Take-Two Interactive (NASDAQ:TTWO): Positive Holiday Themes Emerge & GTA Visibility Improves; Upgrade to OW - Piper

Piper Jaffray upgraded Take-Two Interactive (NASDAQ:TTWO) to Overweight from Neutral with a $18 price target (prev. $12) this morning.

According to the firm three factors lead to a more positive bias:

1) Strong 2012 Holiday Trends and Quality Theme Bode Well for Big Budget Titles in 2013. Three key industry themes have emerged this holiday. 1) Holiday is tracking better than expected. Concerns around social competition and/or console fatigue have proven overly conservative. 2) The top 5 holiday games as a group are growing. Long-tail titles are, in contrast, selling exponentially worse as game quality issues are magnified by negative reviews and social media. 3) The Xbox 360 and PS3 consoles continue to be relevant in 100 million households globally. This represents the largest active console installed base in video game history.

2) Powerful Portfolio of Titles. 2011's Modern Warfare 3 (ATVI) holds the record for biggest 5-day entertainment launch grossing $775 million globally. Piper notes they are confident that GTA V can approach and possibly break this record as their visibility around the title's technical scope and launch timing have improved. Despite being Street high, Piper's June qrtr non-GAAP revenue est. of $1b appears reasonable (Street’s $821m). TTWO's portfolio outside of GTA is the strongest it has ever been. Firm notes, NBA 2K & Borderlands 2 are exceeding estimates this holiday. They are, however, cautious around the 3/26/13 launch of Bioshock Infinite given timing and quality concerns.

3) TTWO shares have outperformed the market leading up to prior GTA launches. Assuming a Jun-13 quarter launch, we are approximately 6 months away from GTA V shipment. Although past performance is not necessarily indicative of future performance, Piper notes that in the past 3 GTA launches, TTWO shares have materially outperformed the market in the 6 months prior to shipment. Specifically, TTWO shares appreciated, on average 32% in the 6 months prior to launch in the last 3 versions, while the NASDAQ was, on average, down - 14% during the same time periods. Outperformance for TTWO vs. the market was material and consistent in each of these 3 periods (see table below) and the least amount of relative outperformance was 32 percentage points.

                          

Raising PT to $18 Based on 12x FY13/FY14 Avg EPS. Piper notes they had previously assigned TTWO a multiple that was discounted (8x) vs. their target multiple of 12x for EA & ATVI. Based on factors discussed in this note, they believe TTWO shares deserve a multiple that is in-line with comps in the space. Firm notes better performance of top 5 titles bodes well for the sell-through prospects of GTA V. They also note an improving portfolio of titles outside of GTA are helping to "smooth" the model.

Notablecalls: This looks like a solid call that could work over the next several months. The last similar Gaming sector call we had was this:

Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs

Worked out just fine.

It's been a while since I've seen a positive Game publisher call. Street high target and estimates too.

Francesca's Holdings Corp (NASDAQ:FRAN): FRAN's Looking Good Again for the Holidays; Upgrade to Buy, PT to $38 - Konik

Jefferies & Co star retail analyst Randal Konik is upgrading Francesca's Holdings Corp (NASDAQ:FRAN) to Buy from Hold this morning with a $38 price tag (prev. $35).

Konik notes that a quarter ago he downgraded FRAN as valuation was high and he was surprised by the recent management change. However, since then valuation has become much more attractive, his confidence in the long term has not waned and he now feels comfortable with new leadership taking the baton.

Why Upgrade In Front Of The Quarter? Based on performance of the retail sector and their view that FRAN's momentum continued into 3Q, Jefferies feels good about 3Q results and think guidance was likely conservative when given on 9/4. The set up is also favorable given very negative sentiment. While it is not their intention to make a direct call on the quarter, as rather they view this as a nice entry point on a LT growth name, they do expect a solid 3Q.

Confidence In New Management. Following the September ’12 announcement of CEO/co-founder John DeMeritt’s departure, they believe the company has transitioned smoothly to the new CEO, Neill Davis. Mr. Davis is currently President and director since 2007, and clearly is very familiar with the company’s operations. Additionally, Jefferies notes they know him from his previous CFO role at Men’s Wearhouse and believe he is a capable and experienced leader. Meanwhile, they also like that Theresa Backes (COO and recently appointed President), a key member of the management team, has been a constant throughout this transition.

Solid Fundamentals. FRAN continues to have some of the strongest fundamentals in retail. The company’s unique real estate strategy and high 4-wall margins yield strong new store economics, with over 150% ROI within the first year. Operating margins are also significantly above industry average, with firm\s model forecasting ~25% operating margins this year. Also, the company's older stores continue to perform very well with SSS up 15-20% in the 1H of calendar 2012.

Valuation Is Again Compelling. FRAN currently trades at 21x EPS and 11x EBITDA, roughly in line with peer growth companies. However, Jefferies believes FRAN warrants a premium valuation given: 1) its early stage of growth vs. peers; 2) superior operating margins; 3) highly visible earnings trajectory of 25-30% annual growth; and 4) strong ROI.

...

And now for the most important chart:

                      


Sentiment Now Too Negative. FRAN’s short interest has risen sharply within recent months, from 14% before 2Q results to 28% at present. Additionally, FRAN has the third highest short interest rate within Jefferies' coverage universe of 25 companies. They believe sentiment is now overly negative at these levels especially given the strong fundamentals and growth story at FRAN.

Notablecalls: Several reasons to like this call:

- FRAN took a 8 pt (-25%) hit last quarter not because of weak results but because of the resignation of CEO/co-founder DeMeritt. Now there's a new CEO in place and has Jeffco's blessing.

- The co is scheduled to report tomorrow. Short interest has been on the raise into the quarter, rivaling only Deckers (NASDAQ:DECK). Jeffco is confident enough to make a positive call on the quarter. That's not something one sees very often. Will create buy interest.

- Konik has the hottest hand in retail right now. He called the bottom in Deckers (NASDAQ:DECK) and Abercrombie (NASDAQ:ANF).

Francesca's (NASDAQ:FRAN) could be next. Has all the characteristics.

I'm thinking +7-10% today, putting $27.50+ level in play.


PS: Posting this around open. Scale into position if possible. Avoid overpaying at around open.

Research in Motion (NASDAQ:RIMM): Upgrading to Buy on positive risk/reward into BlackBerry10 launch - Goldman

Goldman Sachs is joining the Research in Motion (NASDAQ:RIMM) bulls this morning with an upgrade to Buy from Neutral with a $16 price target (prev. $9)

- Their Bull case is $31/share based non FY14 EPS of $3.08

Some context on the recent run – RIMM is up 76% from its September low of $6.31, but still down 23% on the year and down 92% from its 2008 high. The recent run has been driven by better–than-expected August quarter earnings, followed by the announcement that BB10 would launch on January 30 and is in the labs of 50 carriers for final testing, as well as a steady drumbeat of emerging bits of information around the new smartphones’ specs and features (which have been generally impressive). Given that short interest in the stock is at an all-time high at 20% of shares outstanding, Goldman believes short covering has contributed to the sharp bounce off the lows.

Goldman notes they are upgrading the stock as they see a positive risk/reward heading into its BlackBerry 10 (BB10) launch on January 30. For the first time in 3 years, they think out-year Street estimates are too low, as they don’t capture: 1) the ASP lift from BB10; 2) the associated margin improvement; and 3) the channel inventory fill for BB10. They now assess a 30% chance of success for BB10 given positive early reviews, broad-based carrier support, attractive features, and interest by carriers and consumers in broadening the field beyond Android/iOS;

                      

Catalyst
Goldman expects RIM’s results will exceed Street estimates over the next 4 quarters, with their revenue estimates 8% and their quarterly EPS $0.14 above consensus on average. In fact, the firm now estimates that RIM will turn profitable in FY14 (Feb) vs. the consensus view of continued losses. The primary source of upside is their FY14 smartphone ASP estimate of $270, up 21% yoy vs. the consensus view of roughly flat, as they expect BB10 devices priced at over $400 will drive more than a third of the total volume, offsetting sharp declines in emerging markets where ASPs are much lower. Goldman is raising their FY13/14/15 EPS estimates to ($0.99)/$0.20/($0.62) from ($1.07)/($0.52)/($1.61) on higher ASPs and margins as a result of the BB10 ramp, partially offset by much lower units in emerging markets.

A trade or an investment? Time will tell – Even if BB10 is ultimately not successful (which is Goldman\s current base case scenario, at 70% probability) they expect RIMM to outperform over the next 2-4 quarters, as they see upside to Street estimates from higher ASPs and margins as well as channel inventory fill over the next 4 quarters around the BB10 launch. If RIMM does succeed in establishing BB10 as a viable niche ecosystem and sees follow-through demand post the launch (which is Goldman bull case scenario, at 30% probability), then it could further strengthen the long-term investment case.

Notablecalls: The stock took a slight breather following the 2 upgrades (Jeffco and CIBC) that took it from $9.50 to $12 recently.

Now it can proceed higher. I'm thinking $12.50+ today.

Research in Motion (NASDAQ:RIMM): Carriers surprisingly positive on BB10; Upgrade to Hold - Jefferies

Jeffco's well regarded Telco analyst Peter Misek is backing off of his uber-bearish stance on Research in Motion (NASDAQ:RIMM) this AM and upgrading the name to a Hold from Underperform.

- According to Misek RIMM could be a ~$43 stock in 12 months, if things go well.

Preliminary results from Jeffco quarterly handset survey indicate developed market carriers have a much more positive view of BB10 than Misek expected. With greater carrier shelf space and marketing support, he now believes BB10 has a 20%-30% probability of success. While the likelihood is low and Jeffco remains well below St for the Nov Q and Feb Q, the potential reward is high.

Preliminary Survey Results Indicate Carriers Will Support BB10

Checks in the fall of 2010 pointed to a high level of carrier excitement around BB10 (then called QNX). Carriers wanted a third ecosystem to reduce their reliance on Android and iOS.

But two years later, after integration challenges with RIM’s BIS/BES infrastructure and continued execution issues, RIM has still yet to launch BB10 handsets.

This summer the firm trialed the BB10 developer alpha handset. They saw significant potential for it, and it certainly is a vast improvement over BB7 devices; however, they believe it is highly unlikely that BB10 will be an improvement over iOS 6 and that it will be about equal to Android Jelly Bean 4.2.

                     

The delay caused RIM’s new OS to fall from cutting edge to middle of the pack, and Jeffco's own checks indicate that developer support has steeply declined. A large factor was the market share losses (falling from >20% to 5%), which limited the monetization opportunities for developers

Preliminary survey results indicate carriers will support BB10. Jeffco notes they have been surprised by the strongly positive initial feedback on BB10 from carriers (who admittedly have every incentive to be bullish). They are a bit puzzled as they expected a more muted response given BB10 is two years late and RIM's market share has plunged from 20% to 5%. Firm's theory is that carriers see BB10 as one of their last chances to avoid being locked into a long-term smartphone OS duopoly.

Additionally they believe RIM will be swinging for the fences with BB10 and will have significant presence at MWC and potentially even at CES.

Risk/reward more balanced. Scenario #1 (20%): Despite better prospects Jeffco still sees only a 20%-30% of BB10 success as consumer demand will be the ultimate determinate; however, they see BB10 success (which would also increase the potential for licensing) leading to a ~$43 stock in 12 months. Scenario 2 (20%): RIM could be sold if BB10 fails; however, this will likely be a takeunder at $5-$7. Scenario 3 (60%): BB10 fails, no acquisition, and continued cash burn leads the stock toward $0. The weighted probability of these scenarios equals firm's new $10 target.

Notablecalls: Misek is the Axe in RIMM. His comments tend to move the name even if there is no rating change involved. This time there is.

His findings are certainly of interest - who knew the carriers would still be THAT interested in BB10? I certainly didn't. Investors had left this one for dead. Even the turmoil surrounding Nokia (NYSE:NOK) was getting more attention from investors than RIM.

It's all about carrier support these days. And the carriers want to break away from the Android/iOS duopoly. BB10 suddenly has a fighting chance.

Also, more BB10 hype could be in store at MWC and CES, which bodes well for the stock.

Last time Misek upgraded RIM to Hold was back in Dec '11. The stock produced a 10%+ move on the day, 20% move over the next 5 days and a staggering 40% move over the next 30.

There's a 20% short interest in the name. Will they stick around to see if Misek is right and the stock goes up 300% from here? Or will they cover? 4:1 risk reward situation.

I'm thinking $10.50+ levels today.

Computer Sciences (NYSE:CSC): Upgrading to Buy; Turnaround Happening Faster Than Anticipated - Deutsche

Deutsche Bank's Computer Services & IT Consulting analyst Bryan Keane is putting his weight behind Computer Sciences (NYSE:CSC) this AM upgrading the stock to Buy from Hold with a $46 price target.

- This is one of the most strongly worded calls of late.

In 10+ years covering the IT Services industry, they have seen many blow ups and recoveries, and this recovery/plan is setting up as one of the best, Keane tells his clients. He notes they wanted to track a few quarters of the recovery to be sure the correct management team and plan was in place, and they are now convinced that CSC will make a full recovery and come out an even better company after the turnaround is complete. Currently, the stock’s valuation reflects depressed profit levels, which does not take into account the company’s true normalized earnings power, in their view. Although Street sentiment remains overly negative, they believe better-than-expected results (faster-than-anticipated turnaround) will begin to turn the tide more positive.

After faltering significantly in FY12 on lax contract oversight, faulty financial controls, resource mismanagement, and a long-running failure to recognize major shifts in the IT services industry, CSC has arguably turned into a viable turnaround story after instilling new management, redressing its cost structure, and altering its strategic focus. New CEO Mike Lawrie and CFO Paul Saleh have begun to create a culture centered around contract profitability and streamlined operations, changing CSC from a fragmented holding company to a disciplined operating company and rewarding shareholders with higher operating margins and EPS growth as a result. Deutsche believes the turnaround is happening faster and normalized EPS of $5.00+ will be reached earlier than expected (current valuation does not reflect future normalized earnings), warranting multiple expansion to 14x CY13 EPS (shares currently trade at 10x). If they see the full amount of cost saves realized by FY14, Deutsche believes there could be material upside to their EPS expectations. Long term, CSC believes it can achieve and sustain 3-5% top-line growth and 15% EPS growth.

Deutsche sees Accenture, IBM, and CGI Group as CSC’s true comparables in light of their similar business models and margin profiles. As investors generally focus on top-line growth, operating margin expansion, and earnings growth to value multinational IT services companies, the firm believes their target multiples are fair as CSC returns to industrylevel top-line growth while expanding its operating margins to grow EPS. They believe CSC’s multiple could catch up to its peer group average should it achieve industry topline growth and operating margins levels on par with peers earlier than expected.

                         

CSC currently trades at a significant discount to peers even at depressed EBITDA levels (trades at only 3.5x CY13 EV/EBITDA versus peer group of 8.4x). Deutsche is raising their FY14 EPS est $0.29 to $3.51 (above Street) and issuing FY15 EPS of $4.00, believing these figures could prove conservative.

Notablecalls: It's certainly lovely to see an analyst have such conviction in a name. Byrne has done a resonably good job covering the name (he went from Sell to Hold in Oct '11) and is now really pounding away the table.

The stock shot as high as $38/share 10 days ago when they reported better than expected numbers which means the trend is up. If they were willing to buy it there, they will be more than happy to buy it several points lower on this upgrade.

Note how Keane sets a $46 price target while hinting that if the stars really align for the co, this will be a $70+ stock as valuation catches up to sector. Should create ample buy interest.

I'm thinking this one will trade to $36+ in the near-term. Use scale-in approach if possible.

Notable Calls Network: Teavana Holdings (NYSE:TEA)

Notable Calls Network (NCN) caught a big one today.

- Around 2:00 PM ET members started pinging me re: Teavana Holdings (NYSE:TEA). The stock was spiking on moderate volume and noone knew why. Something was clearly going on..

- Around 2:09 PM ET a senior NCN member sent me the following:

TEA? http://www.bizjournals.com/atlanta/news/2012/11/14/source-starbucks-to-acquire-teavana.html

There it was. Atlanta Business Chronicle's Urvaksh Karkaria was out with a piece saying Starbucks was about to acquire Teavana, according to his sources. The piece had been sitting there since 1:48 PM ET.

I quickly blasted the the link to our 300+ Notable Calls Network (NCN) members..
       

                     

             

- As you can see from the chart above the stock started spiking as the link circulated trading desks. Several hundreds of thousands of shares were bought.

- At 2:20 PM ET Teavana (NYSE:TEA) was halted from trading.

- At 2:49 CNBC 'broke' the news followed by Starbucks' PR at 2:51 announcing takeover of Teavana for $15.50/share in cash.

Assuming the 500,000 shares were bought by Notable Calls Network (NCN) members at an average price of $12.50/share we made a cool $1,400,000 on this call. A stretch I know but this how I like to think about it.

We broke this one first. It's tough out there. Calls like this help.


This is how Notable Calls Network (NCN) works - sharing the flow. We catch them every day.

Not all calls are this good (we get many wrong as well) but NCN is for the pros. You decide which calls to take and which one's to leave.

Want to be part of NCN?

It's easy. Just shoot me a brief email that includes a short description of yourself and your AOL nickname.

Please do note that contacts via IM are limited to people with:

- 3+ years of trading experience

- Access to quality research/analyst commentary

- Ability to generate and share (intraday) trading calls

I will not accept contacts from purely technically oriented traders, penny stock fans or people who have less than 3 years of experience in the field.

Concur Technologies (NASDAQ:CNQR): Downgraded to Underweight at Piper Jaffray

Notablecalls: Down doggy! Down!

Apple (NASDAQ:AAPL): Gross Margin Deep Dive 2.0: GM Headwinds Not Secular; Raising CQ4 GM Estimate; Buy - Jefferies

Peter Misek a well plugged in analyst from Jefferies & Co is out with markedly positive comments on Apple (NASDAQ:AAPL) this morning reiterating his Buy rating and $900 price target.

- Apple's gross margin issues will be resolved by Q4, Misek says.

Jefferies sees three sources of CQ4 GM upside: 1) Their analysis of every Apple SKU and component yield issue indicates 168bp of improvement during CQ4; 2) Jeffco's CQ4 53M iPhone est is 5-7M above St, which could boost GM by 80bp; 3) GM guidance historically ~300bp below actual. Their analysis points to another 200bp GM improvement in CQ1. Firm raises their CQ4 GM est from 39.0% to 40.0% (guidance 36%, St 38.6%) and EPS from $15.50 to $16.00 (St $13.52).

GM Deep Dive 2.0 and an analysis of component yield issues indicate 168bp of improvement during CQ4. Jefferies analyzed all the Apple product SKUs' ASP, BOM, and GM. They also analyzed the nine components that their checks indicate are seeing yield issues when trying to meet the high level of demand. Firm's conclusion is that these yield issues are a ~376bp headwind at the beginning of CQ4 but should improve by ~168bp this quarter.

Notably, they think the key bottleneck for the iPhone is currently assembly at Hon Hai. In CQ3 they believe Hon Hai had ~50K idled employees due to component bottlenecks limiting the iPhone 5 ramp. After display and 28nm bottlenecks were alleviated, they believe the situation has flipped and that Hon Hai is trying to hire more people to meet demand. Jeffco believes Apple is paying Hon Hai higher amounts to make up for the idled reserved CQ3 capacity as well as to foster increased CQ4 hiring. Recently Hon Hai’s chairman noted to reporters, “It's not easy to make the iPhones. We are falling short of meeting the huge demand.”

Also, the firm sees Qualcomm’s CQ4 MSM shipment guidance of 168-178M (St 172M) vs. CQ3’s 141M as implying ~60M CQ4 iPhones and supportive of Jeffco's 53M estimate. Qualcomm’s major customers are HTC and Samsung. HTC guided CQ4 revenues -14% Q//Q and Samsung guided its high-end handsets flattish Q/Q. Assuming Qualcomm’s non-Apple business grows slightly Q/Q would imply a 33M increase in iPhone shipments or ~60M total for CQ4.

Jefferies' CQ4 53M iPhone est is 5-7M above St, which could boost GM by 80bp. They continue to believe that the display bottleneck has been worked through, that the current bottleneck is now assembly, and that Apple recently raised its CQ4 iPhone build plan from 55-60M to 60-65M (JEF shipment est 53M). Firm believes St is too low at 46-48M. Firm believes iPhones will have a blended GM of ~48% in FQ1, below the low 50%s GM in prior Qs.

GM guidance historically ~300bp below actual. The last two years Apple has beaten its GM guidance by an average of 291bp and the last two CQ4s Apple has beaten it by 360bp.

Raise  CQ4 GM estimate from 39.0% to 40.0%. Firm notes they originally modeled 300bp above Apple's 36% guidance to account for Apple's typical conservatism; however, their analysis leads us to believe that Apple included no yield improvement for units or COGS in its guidance. They see iPhone upside and continual BOM yield improvements throughout the quarter adding 100bp to their prior GM estimate.

Analysis points to another 200bp GM improvement in CQ1. Jefferies thinks the yield issues will be largely worked through so that the 376bp headwind will have mostly dissipated. This implies a 200bp Q/Q GM uplift to 42.0% (St 41.0%). Additionally, they believe Apple is able to pressure its component suppliers and get price concessions of ~2-5% per Q.

Reiterates Buy and $900 target.

Notablecalls: Margin issues are mostly to blame for the stock's 150pt slide. Now we have a well respected analyst out saying the issues will likely be resolved faster than the Street thinks. That makes the stock a buy. Simple as that.

I would not be surprised to see the stock above $570/share level as soon as today.

Zillow (NYSE:Z): Sometimes It’s Important to Remember These Guys are “Empire Builders”… - PAA Research

Shares of Zillow (NYSE:Z) the online real estate database have been under pressure since late September when Citron Research issued a hit piece on the name calling the business model dysfunctional and advised investors to short the stock. The stock saw another wave of selling last night after the co presented their Q3 results and issued Q4 guidance. To many, below-consensus Q4 numbers appeared to confirm Citron's negative views. Z ended down -20% in after market trading.

Much to my surprise, PAA Research a boutique firm known for their hard hitting negative views is out defending Zillow (NYSE:Z) this morning.

Here's what they have to say:

If you told us heading into the earnings print that Zillow would have added more than 4,000 premier agent subscribers in the third quarter, we almost certainly would have expected Zillow shares to trade higher. Obviously that has not happened and the stock traded off sharply after hours, largely in response to weakness in display ad revenues and disappointing 4Q12 guidance. As long time followers of PAA Research know, we’re not the type of firm that simply espouses the usual “buy the dip” mantra. We view any meaningful reaction in a stock as cause for serious reevaluation of our investment thesis. In our view the circumstances that facilitated the sharp sell-off after hours are as follows:

Zillow completed a secondary offering in early September, including the issuance of roughly 4.0MM primary shares. Growth companies are expected to significantly exceed consensus forecasts following the issuance of stock. Zillow beat numbers handily, but guided lower for 4Q12.

Insiders have continued to sell shares. To be noted, insiders still own more than 30% of the company and the percentage of shares sold has been small, but no one likes looking at form 4 filings every week.

Citron Research issued a “short report” on the company. As a firm that prides itself on short idea generation, we do not take these types of reports lightly. In general we found the report lacking on a number of fronts. For now it appears they’ve been fortunate to be at the “right church and in the wrong pew” as far as their short thesis is concerned. Zillow crushed our estimates for premier agent growth and witnessed solid improvements in ARPU, both of which contradict the principal elements of Citron’s short thesis from what we can see.

Guidance was disappointing and management did a poor job of communicating some of the factors that contributed to the perplexing outlook. Two factors largely contributed to the relatively soft topline guidance: slowing in display ad revenue growth as a result of change in Zillow’s advertising relationship with foreclosure.com and increased transaction and integration costs as a result of two small acquisitions Zillow will complete this quarter. We estimate those two items will reduce Zillow’s EBITDA by more than $2.0 million in 4Q12. Management should have explained these two issues up front rather than having analysts try to “ferret out” their impact.

The question remains: What elements of our thesis have changed here? In the case of Zillow, we continue to be encouraged by robust consumer engagement and increased traction with residential real estate agents. Display revenues were soft in the quarter and are expected to be down sequentially in 4Q12, but that’s not really a principal part of investment thesis on Zillow. The company continues to add tools for residential real estate agents, mortgage brokers/underwriters, and property managers that will increase engagement and customer lifetime value. At the same time, the vibrancy of Zillow’s property database increases with each passing month, which continues to drive higher consumer traffic and engagement. Zillow has established clear mobile leadership and all signs point to the company becoming a preferred marketing partner for agents, mortgage issuers, and other participants in the real estate value chain while establishing itself as the defacto residential real estate search engine for consumers. Zillow management appears focused on building the company for the long haul, which will come at the expense of near term earnings in some cases. They are in short, attempting to build an empire.

In the context of our estimates and the enormous total addressable markets in which the company operates, we think Zillow shares are attractively valued. We anticipate the stock could trade to 35-40x our FY14 EPS estimate within the next 12-months as investors gain greater understanding of the transformational role Zillow can play in the residential real estate market. On a much longer term basis, we anticipate Zillow could generate $1 billion in revenues with EBITDA margins in excess of 40%, which suggests upside in the stock could be far greater than our $50 near term objective.

Notablecalls: The PAA Research piece goes into much more detail (8 pages worth) explaining why the -20% decline in Zillow stock in after hours trading was way overdone. Certainly worth a read, especially if one is short the name.

The co added 4,000 subs which is almost 2x the consensus expectation. Also, the Q4 EBITDA guide miss can be explained by seasonality and the loss of foreclosure.com ad revenues as Zillow launched their own competing service.

Another thing to consider this morning is the fact there are no analyst downgrades in the name. Targets and estimates get lowered but that's about it. Canaccord lowers their target to $45/share (down from $50) noting core business continues to be very strong and is improving etc.

One more thing, you may want to put on your tin foil hat for this: The stocks' 20% decline happened right after the PR where the Q4 guidance miss was disclosed. It appears some players were in a hurry to sell or push the stock down. Yet, during the call the selling subsided as the management started explaining the nature of the guide miss.

So, if one combines all this- the PAA defense, lack of analyst downgrades and the after market trading dynamics, a case for a bounce can be made. Some of the shorts may want to get out here and there may not be enough sellers around. After all, the short interest in the name (vs. float) is gigantic. Everyone and their mother is already short Zillow.

If or when this reverses, I would not be surprised to see $30+ levels in the name today. Most certainly a controversial name so adjust your risk accordingly. Use a scale-in approach if possible.

Netflix (NASDAQ:NFLX): Icahn = Sale? Not so fast..

So what to make of Carl Icahn's involvement in Netflix (NASDAQ:NFLX)? Is he going to push for a sale/takeover of the company or does the billionaire investor have a more cunning plan in mind?

Here's what the analysts think:

- Oppenheimer downgrades Netflix to Perform from Outperform noting that while they continue to believe the co has a strong competitive position, AMZN's future behavior toward subscription video is not predictable and will limit the stock's valuation to 13x US earnings.

Oppenheimer also believes CEO Hastings is a key driver of the long-term success of NFLX, and they do not see him "working" for another company. As such, they think this limits the potential price another company would pay for NFLX.

- Barclays says they believe the perceived strategic value of Netflix is not related to growth or profitability; it’s the value the service has to draw consumers into an ecosystem, similar to Amazon’s Prime Instant Video offering or Apple’s iTunes—loss leading or marginally profitable businesses that promote growth for core platforms like e-Commerce and premium hardware sales. However, the firm is skeptical that a buyer would find more value in purchasing Netflix than building a content offering organically.

- Janney's Tony Wible notes Icahn's disclosure of a 10% stake in NFLX has generated a new round of optimism around the name. His position and two more recent new long term holders essentially reduces the float by 33%; however, his entrance does not assure a turnaround and could disrupt growth if he were to challenge management's strategy as he did with Blockbuster. In a best case and least disruptive scenario he could push shareholders to embrace a sale of the company. His first press comments suggest he may be angling for a sale, although he notes he has no definitive plans, but his reference to US cash flows could also lead one to believe he sees international as a drag.

Strategy Trade-offs - Icahn has typically sought to create value by targeting mismanagement and cost. If that is his angle and he is not pushing for a sale, Wible suspects he would target cutbacks on international. However, NFLX needs international to sustain growth, as the US shows early signs of maturity. The firm maintains that NFLX must hit certain sub milestones to fund its future content obligations (e.g. NFLX is obligated to pay for content in international markets regardless of its initial sub base). It cannot afford to lose sub momentum. Further, NFLX has not demonstrated that it can grow subs without a somewhat commensurate increase in cost. In fact, this past quarter saw a decline in incremental US streaming margin despite some cost controls.

Wible maintains his Neutral rating and $48/share fair value estimate on NFLX.

Notablecalls: So is Icahn's involvement setting Netflix up as a takeover target for the likes of Amazon.com, Microsoft or the movie studios? Possibly. Janney's comments regarding the reduced float are very intriguing as well.

In the very short term however the risk/reward appears to be tilting to the downside. People are likely to use the recent squeeze to take profits, I suspect. Levels around $70-$75 look prudent in the near term.

Rememeber that at $80/share Ichan is already up 30% on his Netflix position.

Chipotle (NYSE:CMG): 2013 SS guide - putting it into perspective

While everyone is freaked out by Chipotle's (NYSE:CMG) 2013 comps guidance, Baird's David Tarantino is about the only analyst out there that puts it into perspective:
     
                   
         
Notablecalls: Not advocating a long here but thought it's worthwhile to highlight this. Looks like CMG has always guided conservatively and then beaten the guide.

Netflix (NASDAQ:NFLX): Taking the money and running; see risk to streaming adds - Merrill

Merrill Lynch/BofA is downgrading Netflix (NASDAQ:NFLX) to Underperform from Buy this morning.

- With the stock up 31% in past two weeks, risks outweigh reward heading into Q3.

Since their upgrade on August 14th, several things have changed that make the firm unwilling to chase this stock after a 31% upward move in the last two weeks, including: 1) Amazon has continued its aggressive content acquisition, buying the Epix content as soon as it came off exclusivity with Netflix thus taking away the most valuable differential for marketing purposes (Epix has the closest thing either company has to recent Hollywood blockbuster content); 2) less comfort in Netflix’s ability to meet even the Street’s relatively low expectations of 6mn net additions to it domestic streaming business; and 3) less acquisition value support at these levels – Amazon is likely content to wait until Netflix is ex-growth in the US and thus cheaper before it considers an acquisition at >$4.09bn (current market capitalization plus some acquisition premium). This quarter reminds them a lot of last quarter, with heavy short covering driving the stock up post quarter end on no or limited news; a set-up the firm doesn't like to see in any hyper-volatile stock like Netflix.

Will it be 7mn, 6mn or 5mn net US streaming ads?
Early this year, Netflix put out a “soft” guidance target of 7mn net sub additions to its domestic streaming business. From their conversations, as well as Street estimates, it is clear that few if any believed this number from the get go and fewer believe it now. Merrill doesn't think the company needs to guide to 7mn net adds for the year (3.5mn in Q4 assuming Q3 is at 1.4mn, the mid-point of guidance), but less than the ~6mn that the Street is modeling could hurt the stock. They see net additions significantly below estimates as the biggest risk to the stock due to: 1) signals Netflix has reached the second inflection point on its penetration curve and 2) domestic streaming subs will plateau sooner than expected, pressuring FY13 ests (they are currently modeling 33mn domestic streaming FY13 subs).

Notablecalls: NFLX is up 17 pts since last Wednesday after the wonderful positive call from Citi (see below) and the relatively ill-timed upgrade from Morgan Stanley yesterday. As Merrill notes, this does remind a lot of last quarter, which ended in a rather painful 20 pt drop in stock price.

In my humble opinion, yesterday's move can solely be attributed to short squeeze as fast money traders attempted to fade the MSCO upgrade. I also suspect many of them ended up covering their shorts by end of day as the stock failed to cave.

These trading dynamics leave NFLX vulnerable to the downside today on the Merrill downgrade.

I'm thinking below $70 level today.

Netflix (NASDAQ:NFLX): It’s our “Screaming” Buy, Citi says.

Citigroup is out positive on Netflix (NASDAQ:NFLX) after their survey revealed surprisingly stable and improving customer satisfaction.

- Firm reiterates their Buy rating and $120 target.

Netflix remains one of the most controversial stocks they cover, Citi notes. It’s their “Screaming” Buy --they say “Buy,” people Scream. Risks here remain significant and include: a) Substantial Content Acquisition Requirements; b) Significant Competition; and c) Significant Uncertainty Re: NFLX’s International Investments. But they will stick with their Buy – highlighting what the firm views as a highly reasonable valuation, a generally positive execution track record, and the still early market opportunity for Internet Video Streaming. Three Updates:

1. Latest Proprietary Consumer Survey Suggests Satisfaction Inflection Point — Citi very recently re-ran their consumer survey (approx 3,800 U.S. Internet users, incl. 1,200+ current & 700 past NFLX subs). Key Takes: 1) Overall customer satisfaction with Netflix has begun to improve for the first time since last Summer’s "Apocaflix" – 48% of current NFLX subs are Very or Extremely Satisfied vs. 44% to 45% levels observed in Q1 & Q2; 2) In terms of Online Video destinations, Netflix’s competitive position continues to rise – the % of respondents listing Netflix as a top destination has increased from 25% in Q2:11 to 30% in Q1:12 to 35% today – although YouTube and Amazon are also showing gains; 3) Churn propensity appears to have improved YTD – the % “Not At All Likely To Churn” has reached a YTD record high of 57%; and perhaps most surprisingly…4) The perceived Streaming content selection appears to have improved – 37% believe that Streaming content availability has improved over the last 12 months vs. only 16% who believe it has worsened.

                           

2. Relatively Neutral Q3 Traffic Trends To Netflix.com — Per comScore, Netflix’s U.S. Website visitors have declined 3% Y/Y in Jul & Aug, or a less worse trend vs. Q2’s 7% decline. And, 12.4MM unique visitors visited Netflix via Smartphones in Jul & Aug. That’s 43% Mobile traffic penetration. And a bit of a reminder that as a subscription service, NFLX benefits from Mobile usage growth – better consumer value proposition with no drag on monetization.

3. The Valuation Case – They continue to see NFLX generating almost $5.50 in U.S. EPS in 2013. That means one can buy NFLX U.S. at 10X P/E, with a free call option on NFLX International. That’s highly reasonable, in Citi's opinion.

Notablecalls: As many of you recall NFLX was a $200 stock when last summer's Apocaflix began. Not saying the decline was solely due to Qwikster etc. but with subs starting to accept the reduced level of content offered by the company, the extreme negative sentiment toward NFLX stock may start to fade.

If churn goes down -> net adds go up. And that's what people are looking for. That's material new info that may actually show up next time NFLX reports.

There is always the issue with international expansion but if the U.S. ops can carry the weight while international moves toward profitability, NFLX may indeed become investable again. NFLX seems at least on track to add 6MM Domestic Streaming subs in ’12 off a 22MM base (that’s hard-to-match growth & size);

This call has a fair chance to generate some meaningful buy/cover interest in the stock n-t.

I'm thinking toward $60/share today.

Screaming Buy.. eh. Nice.

GT Advanced Tech (NASDAQ:GTAT) : Sapphire cover glass opportunity not there; Sell - Canaccord

Canaccord's Jonathan Dorsheimer downgrades GT Advanced Tech (NASDAQ:GTAT) this morning to Hold from Buy while lowering their price target to $6 (prev. $9).

- According to him, Asian meeting don't support the cover glass opportunity touted by management and Wall Street.

Despite the recent optimism and announcements, after speaking with many companies within the sapphire supply chain Dorsheimer concludes that the sapphire cover glass opportunity is not a near-term possibility using GTAT’s ASF method.

He agrees that sapphire covers can come at a premium, but the $10 to $20 price point that GT talks about are possibly consistent for aftermarket but remain 2-4x the target levels for adoption of an iPhone. Dorsheimer also agrees that by increasing charge size, changing things within the sapphire recipe like cycle time, perhaps quality, too, can reduce the cost of the crystal growth. However, the biggest roadblock that we have encountered from GT’s customers, its competitors and other equipment vendors is not necessarily the crystal growth, but the post processing.

Supplier consensus is so far that sapphire windows machined and polished from bulk sapphire boules range from the $25 to $40 for a 4” window – most of it coming from processing – well above the required range.

Asthey have previously indicated, this is an opportunity about which handset makers are seriously inquiring. However, Canaccord's meetings suggest this is Apple-driven and Samsung is heading towards more of a plastic-based OLED approach.

Canaccord says they learned that Apple has been investigating this opportunity since 2006, and Apple has signed NDA’s with many sapphire companies since. So far nobody has been able to resolve the cost/performance issues. They believe that the “signed agreements” GT has spoken about are of this nature and not purchase orders.

They continue to believe that the existence of active mobile sapphire opportunities (camera lens, SOS) and rumors of cover glass de-risks the company’s existing backlog, but they do not see any new large NT orders given what they conclude is a limited commercial opportunity.

Notablecalls: This is a significant call as Canaccord was first to upgrade GTAT on August 17, a day after management touted the sapphire cover glass oppy at Canaccords' growth conference. Other analysts followed and as you can see from the increased trading volume the comments didn't fall on deaf ears.

Now it appears lots of fast money types are buried in the name after the co so conveniently issued a convert and now Canaccord comes in saying all this sapphire hype was for..pretty much nothing. No Apple deals on the horizon, not by a long-shot.

Goldman murdered Veeco (NASDAQ:VECO) with their downgrade two days ago saying LED capital equipment market isn't going to recover much in '13-'14. Ugh.

I think this downgrade will take GTAT closer to $5/share level today. Below $5 in a week?

Sandisk Corp (NASDAQ:SNDK): Time to sell - JMP

JMP Securities is making a somewhat out-of-consensus call this morning downgrading Sandisk Corp (NASDAQ:SNDK) to Market Perform from Outperform.

- Alex Gauna has been OP-rated in SNDK since 2009 when the stock was below $15.

JMP says they see near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent sluggishness in NAND flash pricing improvements, computing and electronics market weakness, and iPhone 5 supply constraints.

Shares of SNDK have risen ~45% from early June lows (SOX +10%) on improving NAND pricing trends and the correct anticipation of its inclusion in the new iPhone 5. Firm believes these favorable developments are now fully reflected in the stock. Although fundamentals are now moving in the right direction for SanDisk and the NAND flash industry as a whole, weakness in computing trends and supply constraints are leading JMP to trim their previously more optimistic 2012 non-GAAP EPS estimate from $2.10 to $2.00 (Street $1.78). They are also revising down their FY13 non-GAAP EPS estimate from $4.00 to $3.50 (Street $3.07) to reflect lower intermediate-term gross margins that may stem from weaker end markets, Samsung looking to fill excess capacity, and Apple (MP) is coming to represent a greater percentage of sales. They view current SNDK trading levels of 13x PE/ FY13 as appropriate relative to our coverage universe average in the low- to mid-teens.

JMP sees near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent slowing in NAND pricing improvements, computing end market weakness, and iPhone 5 supply constraints. Although inclusion in the iPhone 5 puts SanDisk in a good position to meet JMP's 3Q12 revenue growth assumption of +21% q/q (Street +17% q/q), they believe this is in the stock and that any wrinkle could weigh heavily on valuation as recently occurred when iPhone component peer Skyworks (MO, $40 PT, PE based) positively pre-announced, but not by enough.

It is likely premature to get overly upbeat on more rational NAND industry supply additions based on Toshiba's mid-summer announcement of a 30% production cut and a recent report out of Korea speculating that Samsung may reduce capital expenditures by up to 50% in 2013. In JPM's view, there is as much to worry over as cheer from the Toshiba moves represent a magnitude of downward adjustment not seen since the great recession. Also, whatever capex decisions Samsung ultimately makes for 2013, it will first have to absorb an almost 50% increase in capex (>$13B) slated for 2012, in the face of losing the iPhone 5 as a demand driver.

Reducing 2013 gross margin assumptions due to the following: 1) to account for recent weakness in computing market trends and our diminished view of Windows 8 and Ultrabooks as near- to intermediate-term SSD demand catalysts; 2) to bake in the potential of Samsung pricing pressures as it absorbs excess capacity; and 3) to reflect their expectation that Apple sales will drive lower than average gross margins due to the inclusion of its own custom NAND controller architecture.,

Notablecalls: I love it when an analyst changes his/her long-held view, especially when he/she has been so right as Gauna has been in SNDK.

He may be right this time around as well. Avian Securities pinged me with the following Friday afternoon:

SNDK feels heavy again today and I want point out our SNDK commentary from us yesterday.... The stock has had a great run as some competitors have discussed “improving fundamentals”.  Other than stable pricing I’m not sure what they are seeing as improving other than more talk from producers saying they’ll cut CapEx (heard that before).  This is the busiest time of year and there is plenty of supply.  I think it’s time to be looking on the sell side of the name...might be a little early but upper end here and here is yesterdays comments.

9/20 NAND - SNDK, Toshiba, Samsung - We are not nearly as excited at NAND as street is right now. Yes iPhone 5 build and other tablet/phone builds have taken up some supply but without any significant dislocation. SSD demand is not where it needs to be this time of year. SD cards / USB drive sales are still awful. While smartphone builds are good, device loading isn’t growing. This should be seasonally strongest time for NAND consumption and at best we have seen flat pricing after a 6 month freefall. Also Chinese New Year upcoming and our contacts point out that this year only represents 4 days for build vs. 7 days last year. Memory users have front loaded purchases. We acknowledge commentary from memory makers around “restraint” regarding capacity additions but we see little in a positive catalysts now until next summer. Pricing is stable right now but dealer and broker feedback points to plenty of availability and short lead times as evidence of surplus supply. We’d be wary of any rally here.

Avian knows the space well and has made some terrific out-of-consensus calls in the past. So now you know what the smart money is thinking.

I expect SNDK to get hit today and in the n-t as these cautious views spread. Gauna plays the SWKS card so well- the stock got hit -25% merely because they didn't produce blow-out numbers. Could easily happen to SNDK.     

Below $42/share today? Below $40 in a week?

Doesn’t Taste Like Chicken: Upgrading US Containerboard Stocks - Deutsche

Deutsche's Paper & Packaging is eating a bit of crow this morning. They are increasing their probability of success estimate on the current containerboard hike from 50% to 75-80%.

They are upgrading the c'board names, again:

- International Paper (NYSE:IP), Rock-Tenn (NYSE:RKT), Packaging Corp. (NYSE:PKG) and KapStone (NYSE:KS) are all upgraded to Buy from Hold.

According to the firm, two factors have driven their change in view. First, was the Tuesday release of the August industry figures. It is hard to remain neutral in the face of a 115K/ton m/m drop in inventories to the lowest August level in decades & a 97.5% operating rate. Second, subsequent conversations with privately-held players across the trade convinced them that they have been too cautious. As a long-time acquaintance at a private integrated noted on Wednesday evening: 'it is veryunusual, . but we have no incremental tons available for the market.'

Firm says they don't like moving stock calls around rapidly, but they like being wrong even less. If the situation changes and you find yourself on the wrong side of an argument, it’s best to own-up and move forward. With some significant price gains almost certain to be posted in the trade papers this weekend, they are adjusting their ratings.

What will Pulp & Paper Week show for September price levels? This exercise is always a bit like dealing with the “Wizard of Oz” and has the feel of circular logic (let's see - 'you don't move until he moves, but he can't move until you do?’). However, based on additional discussions, DBAB's best “guess-timate” is that PPW will report an increase in the $40/ton range. Based on their channel checks, it would be hard to argue that all $50 is in place. If PPW moves $40/ton this month, the industry is apt to get the balance of the next month.

Off to the races?
While Deutsche team thinks containerboard stocks will trade up in reaction to a strong PPW “print” this weekend, it’s important to make a few points. First, there is no real shortage of bullish sentiment among analysts & investors and current share prices reflect a portion of that sentiment. Second, investors should remain realistic about what a more consolidated & better-managed containerboard sector might deliver financially. They have heard a few arguments about price & margin potential that strike as outlandish & silly. They think there is room for EBITDA margins & returns to improve – but within limits. A “best case” scenario for this industry would be improving margins to reasonable return levels and then focusing on greater stability across the cycle. The food & beverage can industry offers an interesting model. Pushing price too hard in the short-term will damage long-term value. There are always alternatives in packaging. The higher corrugated box prices rise, the greater the customer’s incentive to look at options like returnable plastic containers and shrink wrap. Moreover, higher containerboard prices increase the incentive for upstart players to add supply.

They haven't changed their #'s yet but here's the EPS sensitivity for a $50/ton price hike:
        
                   
             
Notablecalls: Here's the Sept 10 call from DBAB that set it all in motion. It was followed by a downgrade from Longbow a week later that did most of the damage. Longbow is known for their quality checks.

I saw several firms defend the c'board stocks both publicly and in private so it has been a real battle. And now DBAB blinked, just ahead of late-Friday's data release.

As you can see from the above table a lot is at stake and emotions are running high.

I expect a squeeze in the space today. I'm somewhat at a loss as to how high people will bid these names but +4-5% could be the level.

If it doesn't taste, act or look like chicken but Chuck Norris says it's chicken, it's f*cking chicken.

Lamar Advertising (NASDAQ:LAMR): Worth $60/share as a REIT - Goldman Sachs

Goldman Sachs is upgrading Lamar Advertising (NASDAQ:LAMR) to Conviction Buy List from Neutral saying significant upside in store after REIT conversion.

- LAMR worth $60/share at median REIT stock multiple, Goldman says.

Source of opportunity
Goldman upgrades Lamar to Conviction Buy from Neutral, with 29% upside to their new $42 target price. LAMR expects to receive an IRS ruling on its REIT election in 1Q13 and they see a high probability of approval given a recent IRS ruling that established a billboard REIT precedent. While the REIT conversion is not a certainty (due to digital displays), they find the risk-reward compelling with at least 29% upside if election is completed vs. 15% downside if it falls through. Previous REIT conversions have outperformed and may serve as a template for LAMR. AMT/EQIX are up 75%/90% versus the S&P 500 up 30%/16%, since REIT conversion talk began.

Lamar is currently trading at 11X Goldman's 2013E AFFO estimate ($2.99 per share), which is a 45% discount to the REIT sector median and a 21% discount to the median for the bottom quintile of REIT stocks. Firm's revised $42 12-month target price is based on 14X 2013E AFFO, the median for the bottom quintile of REIT stocks. If Lamar traded at the median REIT stock multiple of 20X, then it would imply a value of $60.

If Lamar does receive REIT conversion in 1Q13, what should investors expect out of the stock? Broadly, Goldman expects the stock to perform better than peers as valuation moves to a REIT framework supported by higher trading multiples. However, given the 20% plus move in the stock since mid July and the deterioration in underlying outdoor advertising demand (same board digital revenue flat in 2Q), they believe the near-term price appreciation may be less muted until the IRS responds.
     
                                
 
Since American Tower (AMT) announced its intention to convert to a REIT in May 2010, the stock is up over 70% compared with the S&P up 30%. Slightly less than half of that appreciation occurred within the one year period between AMT’s initial discussion of REIT conversion to the favorable IRS private letter ruling in May 2011. From the time that AMT’s board of directors approved the REIT conversion in late May 2011, the stock is up 34% compared with the market up 6%. While LAMR shares are up more than 20% since July, due to REIT conversion speculation, the AMT exhibit suggests that LAMR shares could significantly outpace the market over the next year.

Notablecalls: REIT conversion - the pair of words that gets people excited these days as evidenced by LAMR's 15% jump on August 8 when the company first officially commented on the topic.

The moves produced by EQIX, AMT and WY following REIT conversion news have investors salivating for more. Now we have Goldman saying it's very likely Lamar (LAMR) can and will convert into a REIT, potentially doubling its current valuation.

I suspect investors will not wait for next year to catch the upside. They will move in to buy the stock now. The upside is that big - possibly as high as 100%.

Provided it already traded as high as $35-36/share on the REIT news a month ago, I expect the stock to produce a sizable move on this Goldman blessing.

Thinking back toward $35 today. Use possible pull backs to scale in.

Definitely one to consider as a longer-term hold as well.

Gambardella @ Metals: The squeeze is over. Sell.

J.P. Morgan's metals whiz Michael Gambardella is downgrading the North American Metals & Mining space this morning:

Among the most interesting names:

- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)

- Others downgraded include AKS, RS and MUSE.

Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.

Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.

Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.

Downgrading AKS, CLF, MUSA, RS and X to N from OW. JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.

Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.

- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.

Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.

- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.

I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)

Notable Calls on Twitter @ thenotablecalls

Today was a perfect example why one should use both the Notable Calls blog and twitter:

- This morning Think Equity analyst Yun Kim made a seemingly big call on TIBCO Software (NASDAQ:TIBX) saying their checks uncovered significant internal issues that led the firm downgrade their rating on the co. I speculated the call would cause a 7-10% decline in the stock and lo and behold I was right.

- Yet, after being down -10% on the day the stock started a slowish recovery until about 12:20 AM ET a fellow trader on Notable Calls Network (NCN) pinged me with the following:

'12:20 ..hearing UBS saying Think Equity is wrong on TIBX.....would be aggressive buyers now !!!'

Shortly after blasting the call to other NCN members I tweeted the call on twitter. As you can see the stock proceeded with a 2 pts+ recovery after Merrill Lynch/Bofa defended the name a while later and the co itself put out a 8-K denying any job cuts.

                          

Beautiful action any way you slice it.

Join us on twitter @ thenotablecalls

Actionable Call Alert: Tibco Software (NASDAQ:TIBX)

It's been a while but Think Equity's Yun Kim is out with a potentially devastating call on TIBCO Software (NASDAQ:TIBX) downgrading the name to Hold from Buy with $32 price target (prev. $36) after their checks revealed lingering organizational issues.

- 10% headcount reduction planned in U.S.

Kim notes additional checks since early last week suggest that there could be some organizational issues lingering in the Americas region, which may result in a reduction in the workforce for the region. They believe it could be a sizable number (maybe up to 10% of the region's headcount) across all functional groups. Firm notes that there were 1,561 employees in the Americas region at the end of FY11. Kim believes some of the reduction is associated with the company's efforts to streamline its operation given the numerous acquisitions it has made over the past several years. However, they also believe that some of the reduction is reflective of lingering organizational and sales execution issues in the Americas region and could signal more modest growth in the region going forward, at least in the near-term.

Kim notes that the company's head of the Americas region left after the end of F2Q due to performance issues. Given that shares are trading at a premium to its peers, the firm expects shares to be under pressure if the company implements a sizable headcount reduction plan, which they believe many investors will interpret as a sign that the company's business trends are turning negative.

They are reducing their license and total revenue estimates going forward, but are maintaining their F3Q top-line estimates given their positive checks, especially in its European region. Think Equity is also raising their margins and EPS estimates to reflect possible headcount reduction and tighter cost controls going forward.

Notablecalls: Actionable Call Alert!

Here's why:

- On July 5, another big-data player Informatica (NASDAQ:INFA) issued a warning blaming mostly internal (sales) execution issues. This resulted in over 30% haircut to share price:

                                  

Here's the release:
http://www.informatica.com/us/company/news-and-events-calendar/press-releases/07052012-preliminary-q2-results.aspx

- Tibco trades around 25x EPS which means execution needs to be flawless. If Kim's right, Tibco shareholders are in for some big time volatility.

I'm guessing 7-10% downside in the n-t for TIBX putting $29-30/share levels in play. Use possible bounces to scale in.

Actionable Call Alert: Containerboard (NYSE:IP, PKG, RKT, KS)

Deutsche Bank's Paper & Forest Products team is making a significant call this morning downgrading their Containerboard space after their checks revealed the widely anticipated autumn price hike may note materialize:

- International Paper (NYSE:IP) to Hold from Buy with $39 price target (prev. $41)
- Packaging Corp. of America (NYSE:PKG) to Hold from Buy with $34 price target (prev. unch)
- Rock-Tenn (NYSE:RKT) to Hold from Buy with $75 price target (prev. $80)
- Kapstone (NYSE:KS) to Hold from Buy with $23 price target (prev. $24)

Over the last 7-8 weeks, the stocks have rallied sharply (up 30-40% in some cases) in anticipation of an autumn price hike. While the market seems to be assuming the hike is a "done deal", the firm notes they are not convinced. They think real questions remain about whether producers can implement & then maintain the increase. If anything, they've become a bit more cautious. Thus, in firm's view, the prudent move is to take a step back from their Buy recommendations.

Since the price hike announcements began to emerge in mid-July, the backdrop for the initiative has gotten murkier
Last week's sub-50 reading on the ISM manufacturing index is a cautionary sign for future containerboard & box demand. At the industry level, the continuing downward drift in old corrugated container (OCC) signals lackluster demand and reduced costs for producers of recycled containerboard. Finally, reports of quiet downtime by at least one major producer raise the question of just "how tight?" the market really is at the moment. While the firm had initially viewed the prospects of a successful hike at 60-70%, they now view the odds at only 50%. A 50/50 handicapping of the price hike is hardly bearish. However, given the optimistic expectations priced into the stocks, it's hard to argue that these stocks need to be our "conviction list".

Unfortunately, they think the Street has placed too much emphasis on this hike attempt as a litmus test of a newly consolidated & restructured industry
As a result, if the price hike fails, the short-term negative reaction in the stocks could prove dramatic. We think the emphasis on & interpretation of the hike is being overdone. While consolidation & more disciplined management should help investment returns over time, they aren't enough to over-ride economic fundamentals. Raising prices in the face of a global economic slowdown, flattish domestic demand and falling costs is a tall order for any industry.

Containerboard price forecasts remain unchanged
As they have not assumed any benefit from the hike in their 2012 estimates, Deutsches's current EPS forecasts remain unchanged. They will continue to monitor supply/demand fundamentals as well as pricing behavior in the market.


Notablecalls: Actionable Call Alert. Most of these names will be down 7-10% on this. Here's why:

- It was DBAB's team that made the initial positive call in the space back on July 10:

A few months back, we didn’t expect to be talking about an autumn price initiative. But, . . . here we go. Over the next several days, DB believes we could hear about containerboard price hike announcements in the $40-60/ton range.
Now let's look at the charts:

                                  

                                 

- CSFB upgraded the space on August 13 driving the names even higher over the next weeks. The reason for the upgrade? You guessed it. Expected containterboard price hikes!

With DBAB team now coming out saying they are not so sure the price hikes will stick, some of that money put to work in the space will need to reverse. Millions of shares will need to be unloaded. This will take weeks.

Mark Wilde and Debbie Jones from DBAB's Paper & Forest Products team have done wonderful work in the space. Give kudos when it's due. I do!

Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs

Goldman Sachs is upgrading Gamestop (NYSE:GME) to Buy from Hold with a 12-month price target of $25 (prev. $20) on a combination of higher operating assumptions from new software and hardware as well as assuming share repurchases supplement dividends to the point of reaching 90% of FCF returned.

- Goldman's estimates stand about 14% above consensus.

They see outperformance of GME shares for three reasons:

1) 2012’s ytd declines have been largely driven by supply rather than demand, and supply will improve in 2H12. As stronger releases hit shelves in 2H12, Goldman expects industry declines to slow, improving sentiment around GME shares.

2) Consensus estimates are not fully factoring in the launch of the Wii U and its impact on 2013 revenue. Even if the Wii U underperforms the original Nintendo Wii by 50%, it will contribute 13 points of growth to software sales. Given the strong lineup of already announced titles for 1H13 and the soft comp from 1H12, the firm expects EPS of $3.82 for GME – 14% above consensus.

3) GME’s cash dividends and share buybacks provide an attractive cash return to shareholders, and build in support for the shares. Given the ~19% FCF yield and ~5.5% dividend yield, they see downside risk somewhat tempered in the near term. GME has returned 114% of FCF over the 12 months ending in April, and the firm doesen't think consensus reflects the consistency of its share repurchases. Its dividend yield is the highest in Goldman's Hardlines coverage, with Staples the closest at 4%, while on a rent-adjusted EV/EBITDAR basis GME trades at 3.9x 2013E vs BestBuy at 4.7x, and office retailers at an average of 5.7x.

While they share investor concerns about the long-term state of physical retail for games in an increasingly digital environment, and reflect this in their 6.5x target EPS multiple, Goldman believes for core console based games disruption of the retail based model is unlikely for the next 2 years given 1) limited hard drive space on consoles today, 2) mass adoption of the next generation of Microsoft or Sony consoles not until 2-3 years after a 2013 launch, or 2015-16, and 3) consumer preference for the salvage value of used games.


* And now for the most interesting part of the call: History of GME shares around console launches

GameStop shares have historically appreciated drastically following the launch of a new console cycle, even when market sentiment leading up to the launch is very negative.

Investor behavior appears similar to the last console cycle.
Leading up to the launch of Microsoft’s Xbox 360 (which ushered in the current console cycle), there was a great deal of negative sentiment surrounding GME shares, as is evidenced by the spike to nearly 50% short interest in October of 2005 – mere weeks before the console’s launch. At that time, there was concern that the new consoles would see poor adoption rates, and that due to the console’s improved internet connectivity, digital distribution might cut GME out of the channel. Short interest went on to plummet for the next year while GME share prices appreciated over 50% in the same period. In the two years following the launch of the current generation’s first console, GME share prices more than tripled.

                     

While Goldman acknowledges that the competitive landscape for gaming has changed since 2005, they still believe that the concerns about adoption rates and digital distribution are overdone, at least for the next two years given 1) no new disruptive console from Microsoft or Sony until late 2013 at the earliest, and 2) a further 2-4 year lag beyond that
for mass adoption.

Notablecalls: Goldman has been Neutral-rated in GME since 2009 and looks like they are calling for another big upside move in the name similar to what we saw in '05-'06. This should generate ample amount of interest, especially given the 40% short interest.

Investors consider the business model broken but Goldman says it ain't so. Digital distribution will be just another part of GME's business.

Also, we may have a big catalyst in the form of Nintendo's Sept 13th press event where they are expected to announce Wii U along with the launch date. We are now in the 8th year of the current console cycle and the Wii U will represent the start of a new one, which is a positive for GME.

The stars may finally be aligning for them.

I'm guessing the stock will be trading closer to $20/sh level today and possibly higher in the coming weeks. All-in-all this is more of a solid L-T call.