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.