Thursday, December 15, 2011

Apple (NASDAQ:AAPL): US Survey Points to 40%+ iPhone and iPad Unit Upside - Morgan Stanley

Morgan Stanley, the uber bull in Apple (NASDAQ:AAPL) is out with some very positive comments on the name after completing their US consumer survey.

- The firm issues a positive Research Tactical Idea (RTI) on AAPL.

Their 3 key takeaways are:

* iPhone demand is tracking ahead of expectations in C4Q11. The survey points to 11-12 million US iPhone shipments in the December quarter, which translates to 31-36 million global shipments. This compares to Morgan Stanley estimate of 30 million and consensus estimate of 28 million.

* Surprisingly, US consumers expect to buy more iPhones in C1Q12 than in C4Q11. Even after applying a 10% discount to C1Q12 purchase intentions, the survey predicts 13 million US iPhone sales or 41 million global iPhone sales in the March quarter. For perspective, the firm currently models 28 million iPhone shipments in C1Q12, down 7% Q/Q. Given iPhone demand will benefit from more country and carrier rollouts next quarter, likely including China, the data bodes well for meaningful iPhone unit upside in early 2012. Applying the average iPhone seasonality over the past two years to C1Q12 shipments based on firm's survey implies 190 million iPhones in CY2012, roughly in-line with the 200 million production capacity Apple is asking suppliers to prepare.

* Perhaps most surprising, US tablet demand remains extremely strong despite recent data points regarding iPad production cuts and Corning’s negative pre-announcement pertaining to Gorilla glass. Only 8% of US consumers own a tablet today but 27% plan to buy one, according to the survey. This represents 63 million future purchases vs. 26.5 million tablets shipped over the past six quarters in the US. While Apple will give up a modest 4 points of share to Amazon’s Kindle Fire, the overall market growth puts upward pressure on their estimates. 13% of US consumers, or about 30 million people, plan to buy the iPad, which compares to about 16.8 million sold in the US to date and our global iPad forecast of 52 million in CY12 (roughly 20 million of which are US). Applying the recent US iPad mix of 37% to the US demand figure implies 81 million global iPad units next year, in-line with the 80 million production capacity Apple is asking suppliers to prepare.

Firm maintains Overweight rating and $480 PT on AAPL. Firm's Bull case stands at $600.

Notablecalls: This should clear some of that uncertainty created by Corning's (GLW) warning.

Would not be surprised to see AAPL move up on this in the n-t.

Tuesday, December 13, 2011

Diamond Foods (NASDAQ:DMND): Finally an End in Sight; Reiterating BUY - Keybanc

KeyBanc analyst Akshay Jagdale is 'pounding the table' on Diamond Foods (NASDAQ:DMND) this morning:

He reiterates his Buy rating and $76 price target on the name.

- Although we had hoped for the investigation to be completed earlier, we view the mid- February completion date as reasonable especially given the number of reputable firms involved in the investigation (Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP). We are glad to see a completion date, albeit a little later than we thought, because it removes uncertainty regarding timing. As far as the outcome of the investigation, our view remains unchanged. We continue to believe that the investigation will reveal that DMND has properly accounted for the various payments it makes to its growers. Furthermore, we continue to believe that the Pringles deal will go through. Regarding the latter, Procter & Gamble Co. (P&G) told us on December 12 that it was not surprised by DMND’s announcement to delay its 10Q filing and P&G remains committed to completing the Pringles deal.

- The mid-February completion date implies roughly three months from start to completion (investigation announced on November 1, outside firms engaged a week or so later). We believe the stock was weak today (December 12) because investors believe that three months is too long for an investigation that seems so straight forward. However, we point out that it took Green Mountain Coffee Roasters, Inc. (GMCR-NASDAQ) close to three months (80 days) to complete its internal investigation as well; GMCR started its audit committee review around September 20, 2010 and restated its financials on December 9, 2010.

- Robert Willens, a third-party consultant we hired in October, was not surprised by yesterday’s announcement. We assume the accuracy of Mr. Willens. Mr. Willens believes that the three-month time frame for the completion of the investigation is reasonable especially given that three very reputable firms are involved in the investigation. Furthermore, Mr. Willens continues to believe that the ongoing investigation will reveal that DMND has properly accounted for the various payments it makes to its growers and there is minimal risk of restatements related to payments to walnut growers. Regarding the risk of restatements, Mr. Willens notes, “The only thing, in my view, that could lead to a restatement is a finding that the contract has somehow been amended, superseded, or abrogated and that the accounting for the payments to the growers does not reflect the terms of the contract as so amended, superseded, or abrogated, in my view a highly unlikely occurrence.”

Regarding valuation, DMND’s stock is down 66% since September 20 (S&P500 is up approximately 3% over that period) owing entirely to a contraction in its 12-month forward PE, which has gone from 29.4x to 10.3x as of today's (December 12) close. At 10.3x NTM EPS (see Table 3), DMND trades at a 58% discount to its consumer growth
peers average of 24.4x and a 51% discount to its historical average PE of 20.9x (range of 8.7-31.9x)

Notablecalls: Jagdale caused a 50%+ move in DMND on Friday but the stock gave 2/3rd of it back yesterday after co announced the internal investigation would take 3 months to complete. Jagdale speculated on Friday the co would file its 10-Q on time, which of course did not happen.

Robert Willens, the 3rd party consultant does offer a compelling explanation for the delay: Lawyers. Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP.

Billable hours. The more the merrier. The go over every little piece of the puzzle with a fine tooth comb. That's how these guys operate.

DMND stock has been an easy target to knock down but I do think Friday's move is not something the shorts want to experience again.

The short interest in DMND is probably still in the 50% range.

I'm thinking another short squeeze coming. $35+? Anyone?

Friday, December 09, 2011

Sears Holdings (NYSE:SHLD): Worth $6? Imperial says so..

Imperial Capital, a little known shop is out with a big negative call on Sears Holdings (NYSE:SHLD) initiating the retailer with an Underperform and $6 price target.

- they are also initiating coverage on SHLD's notes.

Already Weak Financial Results Appear Overstated by Pension Funding Costs; Real Estate and Brand Franchise Value May Not Be Enough to Overcome Tired Retail Operations— Initiating Coverage with a HOLD Rating on the 6.625% Senior Secured Notes due 10/15/18 on Sufficient Tangible Asset Coverage, a SELL Rating on the Long-Dated Senior Notes, and an Underperform Rating on the Shares, with a $6 Price Target.

While the overriding valuation thesis on Sears, they believe, has been its real estate holdings and potentially undervalued leased locations, they think the company’s underfunded pension plan (including significant annual funding requirements) and recently rapidly deteriorating operating performance outweigh the ability to monetize those assets while continuing to operate the retail chains in their current form.

Comments on the common stock:

On an adjusted basis, we believe EBITDA should be viewed as materially lower, given significant, ongoing pension funding requirements. Sears’ EBITDA of $1.3bn in FY10 and $809mn for the LTM ended 10/29/11 does not consider cash pension and post-retirement funding costs of $316mn in FY10 and LTM of $386mn, we believe. We calculate that net adjusted EBITDA (adjusted for cash pension funding costs) was $1.017bn in FY10 and $423mn for LTM—for leverage of 8.2x through the 6.625s (compared to 4.3x before the adjustment) and 10.0x through the unsecured debt (versus 5.2x).

* Recent accelerating deterioration in financial performance is draining cash and will likely require more debt.

* Real estate assets and iconic brands (Craftsman, Kenmore, and DieHard) are not sufficient to overcome underperforming retail operations.

* Sears’ retail operating platforms have been hurt by underinvestment and poor execution while the competitive climate has intensified. Sears’ retail operations have continued to languish over the years— capital expenditures have been running at close to 1% (or less) of revenues compared to 2–3% of revenues for select comp companies such as Lowe’s, Home Depot, Target, and Wal-Mart. Furthermore, customers continue to find store-level staff unmotivated and poorly trained for the most part, according to our experience. In our opinion, customers may be further distanced from the brand due to store level staff not being adequately trained or motivated to provide a high level of service. Meanwhile, the competition continues to take market share.

* The midpoint share valuation in our sum-of-the-parts analysis is $6, thus providing the basis for our share price target. We are valuing Sears Holdings Corporation using a sum-of-the-parts analysis to delineate values for the stronger business segments, including Sears’ 80% stake in Orchard Supply Hardware Corporation (OSH) and catalog retailer Lands’ End. We also assume that the underperforming businesses have value to a strategic investor that is willing to acquire those businesses, invest in the store base and, successfully execute on a retailing strategy. Our midrange enterprise valuation is approximately $6.514bn, which is 11x our FY11 EBITDA estimate of $590.7, 32x our FY11 net adjusted EBITDA estimate of $203.7mn. After deducting $3.474bn of secured debt, $765.9mn of unsecured debt and the pension/post-retirement liability of $1.68bn, we estimate value to the equity of just $591.8mn, or $6 a share, down 91% from the current share price of $60.49. Accordingly, we are initiating coverage coverage with an Underperform rating on the common stock and with SELL ratings on the longer-dated unsecured bonds, which we think will likely trade down on further potential erosion in operating performance.

Notablecalls: Scatching note from Imperial Capital should send SHLD trading down in the n-t despite the already negative Street sentiment and 45% short interest. Note the $6 price target is a mid-point of targets. SHLD could have negative equity value, according to Imperial.

Today's special offer: Walk A Mile in Eddie Lampert's Shoes

Any takers?

Thought so.

I see it trading somewhere in the $50-55 range n-t.

Monday, December 05, 2011

Assured Guaranty (NYSE:AGO): Initiating with a BUY and $35 Target Price - BTIG

BTIG is initiating Assured Guaranty (NYSE:AGO) with a Buy and $35 price target.

Firm views Assured Guaranty's equity as deeply undervalued at current trading levels and anticipate that as the fears that have depressed its share price abate and the viability of its business model becomes more apparent, it will gravitate toward its intrinsic value. Consequently, they believe investors who can appreciate that Assured's risk profile is overstated, and that its ability to generate profitable new business is understated, could realize outsized returns.


While the headwinds Assured (AGO) faces – weakness in the U.S. municipal bond market and the budgetary pressures facing insured municipalities, residual RMBS positions, and exposure to troubled Eurozone countries – are not inconsequential, we believe the market grossly underestimates the company‟s ability to manage these risks. Moreover, we believe fears about these issues have caused many investors to overlook the opportunities AGO has before it as the only bond insurer that continues to write new business while achieving consistent profitability, as well as the benefits it may derive from additional mortgage put-back representation and warranty (R&W) settlements.

We are initiating coverage of Assured Guaranty with a BUY and a $35 price target which is based on a 0.75x multiple of the company's 2012E year-end stand-alone adjusted per share book value of $48.56. We believe some discount to adjusted book value is appropriate, for while we view the AGO'ss portfolio exposures as manageable, they nevertheless present the potential for some loss of value. AGO trades at 0.23x the company's 3Q11 adjusted per share book value.

We believe the market reacted appropriately in providing AGO'ss stock with a boost last week after Standard & Poor‟s announced that the company would maintain its vital „AA's rating, particularly when the company‟s ongoing efforts to boost capital appear to have given the rating staying power. However, we also believe that the stock price does not come close to reflecting what the removal of the rating overhang could mean for AGO as the only currently functioning monoline, and that last week's price action may presage much larger gains ahead.

While the size of the insured and insurable portion of the U.S. municipal bond market is much smaller than it had been prior to the credit crunch, AGO'ss former competitors have either filed for bankruptcy, been acquired, or are in some form of run-off mode. Consequently, AGO has a virtually unimpeded opportunity to increase its penetration of the U.S. public finance (based on new issue transactions) from the 13.3% share it reported in 3Q11. We believe S&P‟s bond-insurance ratings overhaul had a significant negative impact on new business origination in 2011 and it is reasonable to believe that the market – and AGO‟s volumes – could rebound meaningfully in 2012.

AGO during its 3Q11 conference call provided additional information on its exposure to troubled European countries, and the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in particular. The company's total exposure to the five countries is $3.2bn, including $2.2bn of exposure to Italy. The only Eurozone exposure not backed by a revenue-generating project is a $291mm exposure to the government of Greece. AGO does not believe that the current proposal for Greek debt restructuring, which calls for a “voluntary” 50% haircut, would trigger a loss payment since it is characterized as voluntary and is not binding on bondholders. In the event of a Greek default, AGO would be responsible only for the interest payments and final principal payments on the $291mm in debt. Given the long-dated nature of these exposures – the maturities are 2037 and 2057 – we believe the present value of this figure would be manageable for the company. To put this in perspective, AGO's 3Q11 operating income included the effect of lower risk-free rates used to discount losses of approximately $120mm in pre-tax loss expense.

We noted that AGO during 3Q11 repurchased 2mm shares of its stock for a total of $23mm even as concerns about S&P‟s new ratings criteria could impact its capital requirements. The company's ongoing efforts to improve its capital levels through commutations and terminations as well as purchases of wrapped securities and pursuit of R&W settlements could generate excess capital going forward. We believe a portion of this capital could be used for additional buybacks or returned to shareholders in the form of dividends.

Notablecalls: AGO looks like to be in the sweet spot for several reasons:

1) BTIG initiation last week caused a ~30% rally in MBIA (NYSE:MBI), another bond insurer.

2) AGO looks like a leveraged play on the PIIGS debt issue, which looks like could be resolved soon. Notice the yields on last Italian bond action? That's why the mkt has been going up.

3) This thing has been beaten down so hard it's prone to produce a big move.

I would expect a 20% move in AGO based on this, putting $13-13.50 levels in play, possible as soon as today.