Notable Calls

Southwestern Energy (NYSE:SWN): Peak Negativity; Upgrading to OUTPERFORM - BMO

2012-01-23T08:47:00.004-05:00

BMO Capital is upgrading Southwestern Energy (NYSE:SWN) to Outperform from Mkt Perform with a $40 price target calling for Peak in negativity.

- BMO says the change in rating reflects a potential larger value creation event beginning to unfold and which itself is not grounded in natural gas. Their recommendation also hints of the contrarian.

The former speaks to Southwestern’s exploration efforts targeting the Lower Smackover Brown Dense oil formation. Leasehold totals ~500k net acres today. Big footprint. Completion operations commenced on the first horizontal test, with flow rates expected at time of 4Q11/2011 earnings. Two other wells are expected to have been drilled by that time. Talking late February on news flow. Talking potential catalysts on the horizon. The latter speaks to natural gas for which Southwestern Energy is somewhat synonymous. No hiding it. By no means do they imply a change in their less-than-bullish stance on natural gas with this change in recommendation, they say. The firm is simply pointing out the torque SWN affords to any tightening of the supply/demand balance before winter’s end, however temporary the resulting higher commodity price. They do take some comfort that Southwestern has proven to be one of the lowest-cost, highest-margin producers among independents. (Firm puts it in the “survivor” camp among natural gas producers.) They expect to see the same approach to developing the Brown Dense oil resource play. BMO believes a favorable risk/reward now exists for investors to gain exposure to potential near-term catalysts for the shares that could come from successful exploration results, plus torque to any potential, albeit temporary, recovery in domestic natural gas prices. The shares are down ~30% since the start of the winter heating season(November 1) and the multiple has contracted to a 12-month low of ~5.5x.

BMO's estimates are unchanged from those last published January.

Notablecalls: Today is natty day. This comes after Chesapeake (CHK) vowed to curtail Marcellus drilling, sending natural gas prices way higher in minutes. One glimpse at US Natural Gas Fund (UNG) and you see it's a coiled spring.

So, BMO gives you a reason to buy SWN today - says there's a potentially big catalyst waiting in Feb. Calls it best-of-breed, leveraged to natty.

The whole space will be on fire in the n-t. I see SWN trading $31+ today.

Another trader's favorite is Range Resources (NYSE:RRC)

Notable Calls Network (NCN): Sears Holdings (NASDAQ:SHLD)

2012-01-19T14:38:00.003-05:00

We caught a big winner in Notable Calls Network (NCN) this morning - Sears Holdings (NASDAQ:SHLD)

The retailer has been on our radar ever since that Imperial Capital "Sell" call on Dec 9, followed by a significant earnings warning on Dec 27. More recently on Jan 12 commercial financing outfit CIT Group announced halting loans to Sears suppliers, which caused another morning gap-down in the stock.

Plenty of 10% moves up & down.

- Around 09:32 AM ET a senior member of NCN pinged me with the following:

SHLD: +CIT Said to Be Approving Orders for Sears

http://www.wwd.com/retail-news/financial/cit-said-to-be-approving-orders-for-sears-5523527#

(stock sold off big on CIT news removing them before)

Needless to say, this was material new information. Getting it out there to other NCN members was of utmost importance.

The stock had been on bounce/squeeze mode for days and this would only add fuel to the fire.

As you can see from the chart below a 3pt gain was to be had in the next 10-15 minutes.

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

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.

Cree (NASDAQ:CREE): Uptick in China's LED street lighting demand - Piper Jaffray

2012-01-09T08:19:00.004-05:00

Piper Jaffray's Ahmar Zamar is making a positive call on Cree (NASDAQ:CREE) after their checks uncovered a surprising December uptick in China's LED street lighting demand.

- Piper's proprietary checks with downstream LED lighting companies in China suggest Cree's customers likely saw rush orders in December ahead of an earlier Chinese New Year holiday. They met with international and domestic lighting players including TC Interconnect, Neo Neon, Phillips, and Osram over the last few weeks. Firm's checks also revealed that Chinese LED street lighting demand has recovered, and is growing at 30% y/y. Furthermore, competition is limited to leading chip suppliers Cree, Lumileds, and Osram. They view these checks as positive for Cree given 40% revenue exposure to China.

Firm reiterates Overweight and $50 price target on CREE:

China’s LED street lighting market growth resumes. Our checks with downstream LED street lighting players TC Interconnect (9% of street lighting market in China in FY11E) and Neo Neon indicate that Chinese street lighting market demand continues to accelerate, driven mostly by government projects. Based on our checks, we estimate there were a total of 200-300 LED street lighting projects available in 2011. In May 2011, the Chinese government announced the 2nd batch of “10 cities, 10,000 lights” LED street lighting demo projects. This time, it has been extended to 16 additional cities including Beijing, which totals to 37 cities promoting LED street lighting projects in China.

Cree remains the default supplier for Chinese street lighting projects with ~70% market share. Competition for LED street lighting projects in China is limited to 19 downstream companies who have been qualified under NDRC standards in late 2010. Our checks with domestic Chinese street lighting companies (e.g. Unilumin, Kingsun) indicate these companies use Cree chips by default unless the project has other specific requests. Our recent checks with LED street lighting players still rank Cree as the highest quality chip supplier.

Rush orders likely drive upside in December quarter. A December uptick in demand due to rush orders in China could drive upside to our $310m revenue est (cons $310m), but we believe March qtr growth could be more modest at +8% q/q vs our prior estimate of +11% q/q given a likely demand pull-in ahead of Chinese New Year (2 weeks earlier this year).

Notablecalls: This one could work:

- China LED street lighting demand coming back is definitely a surprise.

- What's even more important is the fact Chinese manufacturers are using mainly CREE chips. No local competition, huh?

- PJCO is also making a +ve call on the qtr. Note CREE is set to report on Jan 17, that's a week from now.

- The stock has been beaten to pulp & could be playing ketchup with the rest of the tech sector.

This could translate into 5-7% upside here, putting the stock closer to $24 level in the n-t.

PS: Note how Piper highlights Lumileds (NASDAQ:LEDS) as a leading chip supplier in addition to CREE. Should the China LED story find legs, LEDS could work well. Just take a look at the 40%+ move on Nov 4, 2011 following the news China had started incandescent bulb phase out. CREE was up 10% on that day.

Anyway something to keep on the radar.

I'm posting this on open.

Nokia (NYSE:NOK): Upgraded to Outperform at Credit Suisse

2012-01-05T08:19:00.002-05:00

Credit Suisse's Telco Equipment team is making a rather bold call this morning by upgrading Nokia (NYSE:NOK) to Outperform from Underperform with a price target of $8 (prev. $5.5).

- Actually the upgrade is part of a broader call as the firm is raising their Global 2012 handset estimates while also painting a positive scenario for Microsoft's Windows Phone initiative. They believe WP will become the #3 smartphone OS.

Ok, back to Nokia (NYSE:NOK):

CSFB believes Nokia will start to realise the benefits of transition from Symbian to Windows Phone from 2H 2012 as it can capture 13% global smartphone share in 2013. This will drive a long term turnaround EPS of €€ 0.60 (which is 50% above consensus).

They believe that Nokia’s new Windows Phone-based smartphones are poised to gain traction based on three key factors: 1) strengthening developer/carrier support for the Windows Phone ecosystem, as confirmed by Credit Suisse’s proprietary survey of more than 25 carriers globally, as well as recent application developer surveys and data points, 2) aggressive pricing of Nokia’s Windows Phone devices in the range of €€ 180-300 from the outset, and 3) the quality of the Windows Phone OS platform combined with Nokia’s brand, distribution, scale, and IPR.

Based on these three drivers, the firm believes that the Windows Phone platform will eventually command a significant-enough market share to become the #3 OS in the smartphone market. In fact, the Credit Suisse Telecommunications Equipment Team believes that Nokia will command 13.2% of the total smartphone market by calendar year 2013.

In Credit Suisse’s proprietary survey of more than 25 carriers globally, Windows Phone received higher ratings than RIM in every category surveyed except for messaging. This data further reinforces CSFB's belief that the Windows Phone platform will eventually able to command a significant-enough market share to become the #3 OS in the smartphone market.

In particular, they note Windows Phone’s lead in terms of user interface in Credit Suisse’s proprietary survey of more than 25 carriers globally. Windows Phone’s Metro interface screen is primarily a portal into what Microsoft calls the bigger “panorama.” Whenever the user is within a particular hub, they are looking at a section of that segment. The user can swipe from side to side to pan through all of that hub’s options and capabilities. If this user interface is ported to a larger screen tablet device, conceivably the user will see the whole integrated experience rather than a section of it through a small portal.

....

....

The notes are long, so I can publish only a tiny fraction of it all.

Notablecalls: It's very difficult to find a Buy rated analyst in NOK these days, let alone a Tier-1 one. So this means the upgrade is likely to generate meaningful attention. A major change in view.

I'm thinking 5-7% move in store.

Research in Motion (NASDAQ:RIMM): 16 Sell rated analysts on Wall Street

2011-12-21T08:42:00.001-05:00

Notablecalls: Top left hand corner, 16 Sells vs. 6 Buys vs. 31 Holds.

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

2011-12-15T08:16:00.001-05:00

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

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

Their 3 key takeaways are:

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

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

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

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

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

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

Early Christmas present

2011-12-14T11:29:00.000-05:00

Notablecalls: That rocks guys.

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

2011-12-13T08:45:00.002-05:00

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

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

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

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

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

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

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

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

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

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

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

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

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

2011-12-09T08:33:00.005-05:00

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

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

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

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

Comments on the common stock:

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

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

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

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

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

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

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

Any takers?

Thought so.

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

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

2011-12-05T08:45:00.003-05:00

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

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

THE DETAILS:

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

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

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

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

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

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

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

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

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

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

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

Youku.com (NASDAQ:YOKU): New ban on advertising during TV dramas a major positive

2011-11-28T07:42:00.004-05:00

Youku.com (NASDAQ:YOKU) and other Chinese online-video stocks could be on fire today after news the State Administration of Radio, Film and Television (SARFT) is planning to request that all advertisements aired during TV dramas should be removed nationwide in 2012. The losses caused by this new policy could be in excess of Rmb20bn.

We have couple of firms out with comments:

- Mirae Asset, a HK based brokerage sees this as a major positive to online video companies, including YOKU, TUDO, SOHU and Baidu Qiyi. The firm estimates at least 15-20% of the lost Rmb20bn advertisement fees will flow to online video, with the remaining flowing to outdoor media.

According to iResearch, online video advertisements had a revenue run rate of Rmb1.3bn in 3Q11. In particular:

- While SARFT did not specifically ask to remove advertisements before and after the TV drama (pre-roll and postroll), these advertisements are not as effective as the ones during (mid-roll) the drama. Also, adding pre-roll or postroll inventory would dilute the existing advertisers’ right and reduce their effectiveness. Assistant director of Jiangsu Satellite TV has already confirmed that the mid-roll will not be shifted to pre-roll and post-roll.They believe other TV stations will follow Jiangsu;

- Coupled with SARFT’s earlier regulation for major satellite TV stations to limit the amount of entertainment programming that can be shown in 2012, the cancelled advertisements could find it difficult to shift to other
programs

- Online video is the closest alternative to TV, while outdoor media could also benefit;

- Advertisers are currently planning their budgets for next year. The law came at the right time.

YOKU will be the major beneficiary because its market share has gained
Mirae estimates YOKU to get 40-50% of the incremental advertising spending in online video because YOKU’s has enough inventories to digest the advertisers’ demands. Baidu Qiyi has already added mid-roll advertising but YOKU hasn’t, which means it can now sell for a higher price.

YOKU’s aggressive investment strategy will pay off. In October, YOKU’s time spent market share within the top 15 (P2P and web combined) rose 2.3ppt to 17.3%, the fastest gainer in the month, while SOHU Video, TUDO and Baidu Qiyi lost ground. If only counting web, YOKU’s time market share increased to 34% in October from 29% in September.

In 2012, YOKU has secured 22 exclusive TV dramas. With YOKU’s overall utilization still in the mid 20%’s, the chance for it to further increase revenue growth is high.

YOKU is Mirae's #3 top pick in China’s Internet sector with a TP of US$31.5.

- Goldman Sachs' Catherine Leung views these proposed regulations as materially positive for online video in general and Youku (YOKU) in particular.

The proposed regulations coincide with mass adoption of online video, with Youku leading in user traffic and time spent.

The regulations would follow recent SARFT rules issued in late October limiting entertainment content (e.g. variety shows) and imposing some ad controls. For example, Xinhua has reported possible new regulations to further restrict the amount of prime-time entertainment content among satellite TV stations.

Leung reiterates Conviction Buy rating on YOKU.

Notablecalls: If Mirae estimates prove to be correct, the new SARFT rules could more than double China's online-video opportunity. With YOKU among the top-tier players, this could prove to be very beneficial for them.

Do note however that analyst consensus revenue #'s for 2012 already foresee a 100% growth rate. Nonetheless a material positive, as GSCO notes.

I'm thinking $17.50+, that's a 10%+ move.

Focus Media (NASDAQ:FMCN): The Waters are Clear - WEDGE PARTNERS

2011-11-22T10:26:00.004-05:00

Quick note: Long term Focus Media (NASDAQ:FMCN) bull Juan Lin from Wedge Partners is out with some thoughtful comments on the name. . I've been on FMCN's case past 24 hrs so I'm posting for the sake of objectivity. Worth a read guys.

The Waters are Clear

Yesterday research firm Muddy Waters posted a report on Focus Media (FMCN) recommending a ‘strong sell’ on the stock based on an accusation of fraudulently reporting operating numbers and historical write-downs. We believe that most of the comments are based on historic events, misunderstandings of the business and has insufficient support to lead to the conclusion.

MW: FMCN has been fraudulently overstating the number of screens in its LCD network by approximately 50% – particularly in Tier I cities. FMCN claims to operate 178,382 screens, but the actual number in FMCN’s media kit is less than 120,000. This is similar to China MediaExpress Holdings, Inc. (OTC: CCME), which we reported is a fraud on February 3, 2011. We therefore question whether FMCN’s core LCD business is viable.

The LCD commercial network includes LCD TV screens and LCD digital poster frames. MW only counted LCD TV screens to accuse the company of fraudulently overstating the number of screens. The company sells to advertisers with detailed lists of buildings and numbers of screens in the building, who understand the difference.

FMCN also plans to ask a well-known global third party survey company to investigate the number of screens. The company will hopefully deliver the report in 2-3 weeks.

MW: Like Olympus, FMCN is significantly and deliberately overpaying for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005. These write-downs are equivalent to one-third of FMCN’s present enterprise value. FMCN’s overpayments include fraudulently booking at least six mobile handset advertising acquisitions that it never made. Olympus’s situation may explain why FMCN overpays for acquisitions. Olympus management has stated that Olympus deliberately overpaid for acquisitions in order to disguise losses on investments. Questions remain about whether individuals associated with these transactions also pocketed the money, and / or whether the acquisitions were really used to cover losses in Olympus’s seemingly robust core business.

We went through the time periods when Chinese outdoors media companies were having severe competition in expanding market share. In order to demonstrate consistent strong growth, Focus Media decided to make massive acquisitions through earn-out terms. The company had to sometimes pay a very high premium in order to stop competitors from issuing IPOs. Target Media, Frame Media and CGEN were the primary cases. We have talked to people in this industry and understand the acquisition of these entities were NOT fraudulent, although the acquisition of CGEN was a failure.

MW: FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration. We show that many of these write-downs are not justified. There are several possible nefarious reasons FMCN gives acquisitions away, including doing so may put FMCN’s problems beyond the reach of auditors.

The company used to have a bad strategy of expanding through acquisitions. Some of the acquisitions were unwise and not well assessed. The company learned from that lesson and has not made any further acquisitions in the last three years. The company disposed of all of the subsidiaries from 2009 to 2011 since Jason Jiang returned to the company in 2009. The focus on core business development has been proven to be successful. The company does not intend to make major acquisitions in the foreseeable future either.

The company indeed used to overpay for some of the acquisitions and decided to stop paying for the second and third payments due to the tough advertising environment in 2009 in order to maintain cash. The impairment of acquired companies is mainly due to such situations and also the write down the company had to take after the stock price dropped from $60 to $6. Other examples like Allyes and some media companies do not have a lot of assets apart from people, so the large impairment is also understandable once the operation is not going well and talent left the company.

Another reason for some impairment is due to the Shanghai Expo during which the Shanghai government prohibited outdoor advertising in certain ways in 2010.

MW: Sales of FMCN shares by insiders have netted them at least $1.7 billion since FMCN went public in 2005.

The shareholders mainly include early investors including Softbank, IDG, Goldman Sachs, and management of Target Media and Frame Media. More importantly, CEO Jason Jiang has not sold any shares since 2006; but, instead, increased his share of the company over time.

On its conference call this morning with investors, FMCN stated that it is talking to its law firm in deciding whether to file a lawsuit in responding to Muddy Waters’ ‘misleading report’. The company maintains its outlook for 25% top line growth for 2012, of which 20% is organic growth and 5% from the new interactive screen business, and has not yet seen any abnormal spending pattern from advertisers. Advertisers have also provided positive feedback to FMCN’s new interactive screen business. Additionally, the company plans to accelerate share its buyback plan due to the share price drop caused by the MW report.

While remaining concerned about the potential growth slowdown of next year’s advertising market due to the macroeconomic environment, we have learned that the digital out-of-home market has been evolving from 2008, and has become a strong substitute for TV advertising. Advertisers have been driven away from the TV platform by the price hike (over 30% annually) and have gradually dropped some low quality, local TV stations. Advertisers are shifting budget to outdoor digital platforms and online especially online video platforms. For outdoor platforms, those who can reach to end consumers, including Focus Media’s networks, in-store screen networks, in-cinema advertising networks, bus-stop posters and ad networks on transportation tools should see healthy growth.

Furthermore, the possibility of advertisers suddenly ceasing spending like what happened in late 2008 will unlikely happen either in 2011 or next year. We have seen the normal year-end advertising budget flush into various media platforms, and the current feedback from advertisers on outdoors advertising platform still indicates normal growth for next year.

Compared to Focus Media’s platform, which can provide sales campaign themed ads, we are more concerned about traditional billboard and brand advertising platforms such as AirMedia’s platform.

Notablecalls: The problem with FMCN doesn't seem to be related to their core business but rather related party transactions.

Focus Media major holders:

2011-11-21T13:16:00.001-05:00

Notablecalls: They are all going to be sellers.

Notable Calls on Twitter

2011-11-20T14:39:00.005-05:00

As some of you may have noticed, I haven't been that active in posting over the past couple of months. This can partly be explained by lack of substantive calls and the overall tough trading environment but Twitter does have a major part to play.

http://twitter.com/#/thenotablecalls

It's just that cramming my thoughts into 140 character pings via Twitter has been so much more time effective than writing & editing long blog postings.

Oh, and I get to change my mind there!

Let me give you an example:

- Nov 17: Salesforce.com (NYSE:CRM) issued worse than expected results, causing the stock to drop as low as $112 (prev. close $126.09) in after hours trading. The stock rebounded to $118 after management gave it their best shot to explain away the deferred revenue & billings miss on the conference call.

- Nov 18: After shifting through the overnight analyst commentary on Salesforce.com (NYSE:CRM) I posted the following comments around 07:00 AM ET. The stock was trading at around $117.

$CRM - Every Tier-1 firm out defending Salesforce.com (CRM) this AM following #'s. Sell side lovefest. It's down 9pts from close. Bounce?

$CRM - DBAB's Tom Ernst PT now $205, new Street high. 'Contracting optics obscure accelerating momentum' he says.

As you can see from the chart, the stock staged a 4 pt rebound in little over an hour as traders started playing the bounce.

- 08:37 AM ET however I posted the following:

$CRM - My fav girl in the business pings me ' Check out Difucci @ JPM', she says. I'm reading it, doesn't sound so hot.

$CRM - JPM's DiFucci notes CRM saw similar billings miss going into recession of ’08/09. Mngmt sounded very bullish at the time.

$CRM - ' the only good reason is that growth declined. Guidance implies similar growth rates.' Difucci says.

Definitely a game changer there. The comments from JPMorgan's John DiFucci would almost certainly hurt the stock. (She was right as usual).

- 09:14 After reading the full analyst note in detail I added:

$CRM - 'Most troubling is that new biz grwth dclned to 12% per our calc from 42% in the JulQ after 5 straight Qs of >55% growth,' JPM says

If you look at the chart the stock never really looked back after the JPM comments declining from $120 to as low as $114 right after open. That's a potential 6 pt gain on the short side.

The beauty of it all? I got to change my mind. That's not something I would get to do in the blog. At least not with such ease.

I will keep posting on the blog as some calls still need to be expressed in more detail. But do check out the Twitter thing. It's actually fairly.. er.. cool?

http://twitter.com/#/thenotablecalls

Bio-Reference Labs (NASDAQ:BRLI): Jefferies throws in the towel..

2011-11-11T08:06:00.004-05:00

Bio-Reference Labs (NASDAQ:BRLI) a lab testing company currently under siege from short-sellers at Streetsweeper.org appears to be losing Sell side analyst support this morning after Jefferies & Co decides to put their rating Under Review (prev. Hold).

- Jefferies analyst Arthur Henderson notes they expect BRLI shares to see increased pressure after a second short report, published on Thursday afternoon, criticized the company's business practices and the background of certain employees. While they have no reason to believe the company has done or is doing anything inappropriate or unethical, the firm believes the news will not be well received and could elicit scrutiny from regulators. Rating under review (from Hold).

The details:

The Street Sweeper strikes again. On Thursday afternoon, The Street Sweeper, an online research organization whose goal is "to uncover the dirty little secrets that investors need to know," released the second part of its investigation into BRLI's business practices. The report digs deeper into BRLI and discusses the alleged sordid background of a few current and former employees. As a reminder, the first report was issued on November 1st and raised concerns about the viability and sustainability of BRLI's earnings growth, which has been fueled in part by increased utilization of the company's GenPap test -- a sophisticated test allowing OB/GYNs to better screen and detect a wide range of organisms such as chlamydia, gonorrhea, syphilis, etc. That report also articulated concerns about the company's billing practices, its weak cash flows, and salesforce tactics.

A new overhang emerges for BRLI. The Street Sweeper report is definitely an eyeopener and could spook investors as well as draw the attention of regulators. While we have no reason or evidence to conclude that the company or its employees have done anything unethical or inappropriate, the allegations are poignant and could provide a meaningful overhang on BRLI shares.

Notablecalls: Well this is alarming. I expected a garden variety Sells side defense but not this.

With Henderson calling the Sweeper report an 'eyeopener with potential to draw regulatory attention' I would not be surprised to see the stock in free fall.

Note there's 28% short interest in the name.

Here are the reports:

Is Bio-Reference Laboratories as Healthy as It Seems?

Bio-Reference (BRLI): Loads of Dirty Laundry

Actionable Call Alert: Green Mountain Coffee (NASDAQ:GMCR) - Bounce?

2011-11-10T06:55:00.003-05:00

Geen Mountain Coffee (NASDAQ:GMCR) trading down 30%+ following results and guidance reported last night.

- Most analysts are defending the name.

- Canaccord analyst Scott Van Winkle highlights something I would like to share with you:

'...A bear would argue that our (positive) opinion is shaded by our rose colored glasses. Well, we heard people saying the exact same thing in the exact same situation in Hansen Natural (HANS : NASDAQ : $90.09 | HOLD) in May 2010. We remember this so clearly because the HANS correction last May was the greatest buying opportunity we have ever seem on a timing issue around a price increase and the greatest miss we have ever had as a sell-side analyst. HANS instituted a price increase in January 2010 that led to massive buying by distributors ahead of the increase and even though the company knew there was a channel load, it didn’t realize how significant the buy-ahead was. Sound familiar? The result was that HANS crushed Q4/2009 results and then missed the subsequent Q1/2010 estimates by an even wider margin than GMCR’s relatively modest miss last night. HANS shares plummeted from near $45 to as low as $25 intraday.

The stock plummeted on an apparent slowing. Yet, third-party data from the likes of Nielsen and IRI continued to show robust growth at point of sale. Sound familiar? GMCR just put up a figure that will lead some investors to think business is slowing. It isn’t, in our view, because the third-party data from the likes of Nielsen and IRI, but more importantly NPD on brewers, show continued growth and even accelerated growth of brewers. For those who follow consumer staples, we don’t need to remind you what happened next with HANS. It is obvious in hindsight. Growth continued, shipments caught back up to the sell-through data in the next quarter, and HANS went on an extended rally to close yesterday at $90.09 ($97.31 is the recent high). If you dumped HANS on the miss, you missed a triple. This may not sound familiar yet for GMCR, but we expect it will....'

Notablecalls: Just draw your own conclusions. Calling it Actionable Call Alert!

"History doesn't repeat itself, but it does rhyme."

-- Mark Twain

Dreamworks (NYSE:DWA): Renewed Optimism Creates Selling Opportunity – Downgrading To Sell, $12 PT - Janney

2011-11-09T08:59:00.003-05:00

Janney's Tony Wible is dealing a potential death blow to Dreamworks Animation SKG (NYSE:DWA) downgrading the name to Sell from Hold while lowering his price target to Street low of $12.

According to Wible they are increasingly concerned about the decay in franchise film performance, the possible cannibalization from the NFLX deal, the weak open on Puss in Boots, and their diminished outlook on new IP films. These concerns are exacerbated by the steep decline in DWA's DVD sales, but is partly tempered by better international performance, the near term boost from NFLX catalog sales, strong non-film performance, and the potential for self distribution savings in 2013. On balance, Janney believes estimates will need to move lower and sees the risk/reward on the stock in favor of a Sell rating.

KEY POINTS:

Downgrade on Spike and Optimism - We are downgrading DWA to Sell from Neutral, as we believe the street is too optimistic about the rebound prospects on Puss In Boots, which we believe is now trending towards a $135 million USBO ultimate (below our reduced expectations). The under performance leads us to question the prospects on DWA's future slate of new IP films. We are reducing our fair value to $12 based on the reduction in our estimates.

Lower Generic Expectations - We believe the generic $200 million USBO film will trend down to $175 million. While foreign performance has helped worldwide numbers, the high rental rates offset much of the benefit. Our reduction of Puss In Boots numbers and the reduction in new IP film estimates (Guardians, Croods, Turbo, Shadow) lead us to reduce our 2012 and 2013 EPS to $1.07 and $0.95 from $1.41 and $1.50, respectively.

Franchise Fatigue - The core of DWA's business has been under pressure as established franchises are decaying faster than expected while new IP films have yet to create new franchises. The company is still producing some of the highest grossing animated films but the relative weakness and the string of disappointments will likely cast more doubt over future releases. Mounting competition also stands to commoditize the value of DWA's IP.

DVD Doubts - The entire industry has seen weakness in disc sales. However, DWA's compression in DVD to Box office ratios have been higher than its peers, which we ascribe to its support of cheap rental services. While the new NFLX deal will provide incremental catalog revenue near term, this deal has the potential to cannibalize new release and catalog disc sales as the output deal launches in 2013.

Foreign Exchange - The recent strength in the USD could be another headwind for DWA, as it produces its films in USD but sees more than half its revenue from international markets. The high USD would essentially deprive DWA of high margin revenue. While P&A spend is a hedge, each DWA film is expected to be profitable so the hit to revenue will be greater than the expense offset. We would note there has been recent weakness in key Latin American currencies that are now trending between a 4% to 8% YOY headwind.

One Last Hurrah - Puss will likely rule the USBO for one final weekend and may gross between $25 to $35 million, which could fuel more bullish optimism. However, Puss's run is coming to a close as Happy Feet 2 launches next week.

Notablecalls: So who is Tony Wible from Janney you ask? The guy who nailed (or killed) Netflix.

- April 26, 2011: Headwinds Trump Momentum – Downgrading To SELL

- Oct 10, 2011: Upgrade to Hold

- Oct 25, 2011: Downgrade to SELL with $51 PT

And now it appears he is going after DWA with similar vigor, cutting PT and estimates way below Street.

This alone should send tremors down the holders' spines.

DWA should get hit after open and then drift down in the n-t, possibly below $18 level.

PS: I'm posting this around open.

Career Education Corp. (NASDAQ:CECO): Ugh..

2011-11-02T08:38:00.004-04:00

Career Education Corp. (NASDAQ:CECO) literally shit the bed last night as the co issued a slew of announcements this evening, including 1) the resignation of CEO Gary McCullough, 2) an update on its internal investigation into placement rates, and 3) its third-quarter results (a week earlier than expected). Board chairman Steven Lesnick has been named CEO while the board conducts a search for a permanent replacement.

CECO revealed that 36 of its 49 ACICS-accredited Health Ed and Art & Design schools failed to meet minimum accreditation standards for its placement rates in 2010-2011.

I've seen 3 downgrades so far but I'm quite sure more will follow after the 8:30 AM ET conference call concludes:

- William Blair is lowering CECO to Underperform saying that given 1) the likelihood that estimates will come down a lot for 2012 and 2013, 2) the chance of a material fine/settlement could occur, and 3) visibility on a recovery in starts for every franchise but the international business, it is difficult to value (in other words where would the stock be a buy) the enterprise with traditional metrics. On a rough sum-of-the-parts basis, (no value for Health or A&D, $50 million to $150 million in legal liabilities or fines, and $300 million in teachout cash flow losses over 2 years at Health and A&D) they believe the stock is worth probably $10 and $12, but a lot of that value depends on what 2012 profits in the University segment are; hopefully they will get a better feel for that on Wednesday’s call.

- First Analysis cuts CECO to Underweight noting they believe the independent counsel has not yet completed its investigation into the company's other segments, suggesting additional issues may still be uncovered. AIU and CTU are regionally accredited and thus don't have to report placement-rate data to their accrediting body (the Higher Learning Commission), though they believe they have provided placement data to prospective students, potentially exposing them to other legal and regulatory risks if the data proves to have been inaccurate.

Firm expects Career Education's stock will trade down meaningfully today. However, given the difficult-to-quantify and potentially substantial nature of the issues noted above, they find it difficult to recommend even investors with a deep value focus take a meaningful position in the stock at present.

They believe other names in the sector may trade down as well as investors ask whether others could have similar issues. Firm reminds investors that many of the companies in their coverage universe are regionally accredited and don't purport to offer placement services, much less report placement rates to their accrediting bodies. (These include Apollo, American Public Education, Capella, Strayer, and institutions at non-covered companies Bridgepoint and Grand Canyon. DeVry University is also regionally accredited, and while it does provide graduate employment data to students, First Analysis is confident in DeVry's internal controls.) They also believe nationally accredited schools that have grown organically, such as ITT and UTI, have operational controls in place to prevent such issues. Finally, they note that while Career Education's announcement may provide another arrow for Senator Harkin's quiver in his campaign to further clamp down on the sector, the placement-rate question isn't a new one, and a hearing he held in September 2010 was on precisely this topic.

- Stifel cuts to Hold from Buy noting that while an earnings and enrollment miss in this very challenging environment is not shocking, their original Buy thesis was predicated on the sum of the parts being greater than the enterprise value, improving academic quality, and progress being made by a relative newer management team. While progress was made on several fronts, the board’s decision to accept the CEO’s resignation in light of recent allegations of inflated placement rates in the health care division suggest lacking integrity in disclosed metrics. As such the firm believes the stock will be in the state of limbo for the foreseeable future. They therefore feel compelled to move to the sidelines until the management situation is clarified/resolved.

- CSFB says they expect shares to face significant pressure this morning.

- Baird says they expect CECO to trade down today.

- Morgan Stanley notes they expect shares of CECO to decline sharply as investors come to terms with the CEO’s sudden departure, findings by outside counsel of improper placement practices, and pre-reported weak Q3 results. CECO has a history of accreditation issues and in the current environment, in which accrediting bodies have been under pressure to better police the industry, they do not expect this to be handled with leniency. Firm notes though that this issue appears to be CECO specific and while the whole group is likely to trade off, they would view this as a buying opportunity for companies with better records of regulatory compliance.

Notablecalls: Reading the PR, all I could think was 'is this going to single digits now?'

Utter clusterf*ck and this could get worse as the independent counsel completes its investigation. Note the 49 colleges investigated represent around 40% of CECO revenues. So there could be more to come.

CECO has 6 bucks of cash per share on the balance sheet, which should limit the downside to $9-10 level.

This could hurt the entire sector. It's unlikely CECO is alone in this with its placement issues.

Acme Packet (NASDAQ:APKT): Positive checks on Tier-1 VoIP Platforms opportunity - Deutsche

2011-10-27T07:39:00.005-04:00

Deutsche Bank's Wireless Eq. team is making an interesting call in Acme Packet (NASDAQ:APKT) saying their latest round of industry checks have meaningfully improved their conviction on the Tier-1 VoIP Platform deal consummation for Acme in Q4.

Further, their checks suggest potential for meaningful upside to Acme's runrate SBC business in Q4, especially from large enterprise SBC deal closures. The SBC pricing and competitive environment remains benign in firm's view, with no meaningful near-term share gains from Acme's competitors (Alcatel Lucent, Genband, Sonus, Cisco etc).

- Firm is adding APKT to their s-t Solar Buy List.

The details:

See upside to Q4 and FY12+ view
Lack of clarity from management regarding the pending Tier-1 VoIP platform award (management guiding to sometime in 1H Q4 for closure of the deal, versus confirming the deal closure, during last week's earnings call) has been a major overhang on the stock, with bears pointing to potential for growth moderation across multiple segments of Acme's business, in addition to potential for the VoIP deal to slip into FY12. We disagree with the bear-case thesis (playing out in the stock somewhat, at current levels) and instead articulate a bullish view on Acme's Q4 and on their FY12+ growth opportunities, based on our latest checks and our view of Acme's market leadership position in the SBC market. Even a slight upside to the $93 m Q4 consensus expectation is likely to be cheered by investors, given that it represents the company's ability to successfully carry $100 m quarters in FY12+ (from an operational and sales execution point of view).

Reiterate our Buy rating
We fundamentally believe that major initiatives such as: 1) carrier VoIP platforms; 2) enterprise SIP trunking; 3) IP session recording; 4) telco and cableco VoIP peering etc., are the next phase of growth opportunities for Acme. We see favorable risk/reward at current levels (stock implying a +20% FY12 growth rate versus our +28% estimate). We reiterate our Buy rating.

Notablecalls: APKT was the (the!) momentum name of 2010 and 2011 as it went from sub $10 to $85.

Now it has given back 2/3 of that in just 4-5 months as the market crumbled and shorts smelled blood in form of AT&T's VoIP platform delays.

The management did a terrible job explaining (or rather not explaining) the delays around last qtr, causing another 20% haircut in the stock price.

Yet now we have Brian Modoff from DBAB saying his intel points to AT&T contract coming through. Also, the SBC business appears to be running strong.

This is a gutsy call. He must know something.

The stock should move up. This could cause a 7-10% move in the n-t.

Actionable Call Alert: Green Mountain Coffee (NASDAQ:GMCR)

2011-10-21T07:37:00.003-04:00

SunTrust analyst William Chappell is literally pounding the table on Green Mountain Coffee (NASDAQ:GMCR) saying short seller David Einhorn is utterly wrong with his short thesis on the stock.

- Firm strongly reiterates Buy and adds to Top Pick status with $120 price target.

Chappell notes that Einhorn used their research reports (without their permission) as the basis for his negative conference presentation against GMCR. The report was made publicly available on Wednesday and the firm has since had a chance to “dissect his dissection” of their positive investment thesis.

- While there were no surprises in the presentation, the analyst does want to address several errors and omissions in that report to clarify his case. First, they remain comfortable in their $9 EPS analysis vs. his $3.50 estimate. The major errors to his math come on the “profit to split” analysis in which he appears to double-count the packaging costs, and his assumption for 20% private label share in k-cups, a penetration level which we will explain below to be STATISTICALLY impossible. Suntrust also notes that neither their $9 estimate, nor his $3.50 estimate, include potential profits from the highly profitable away from home segment.

Here are couple of examples of Chappell's counter:

Questioning the Starbucks Economics (slides 32 to 37)—As GMCR has previously said, it will make the same penny profit per k-cup on its brands as it will on partnered brands such as SBUX and Dunkin’ Brands. According to the investor, SBUX has said that it will make 2/3 of the profit and GMCR will make 1/3 of the total profit on each cup which, for the sake of argument, we will assume is correct. The problem lies in the investor’s math. Based on slide 35 he indicated that the total potential profit to share (i.e. split 2/3 to 1/3) is $0.22/k-cup. However, his analysis includes the assumption that BOTH companies will be paying $0.15/k‐cup for packaging when, in fact, SBUX is paying GMCR for the packaging services. If we eliminate this double‐count and assume that the cost of packaging is closer to $0.04-$0.05 per k-cup (based on prior statements by GMCR), the total profit to split is closer to $0.33/cup. If we then say that GMCR only takes a 1/3 of that profit per cup it would equate to $0.11, which is in line with our prior math.

Before leaving this item, we point out that, in our opinion, SBUX needed the GMCR partnership. Over the past decade, consumers were able to purchase single serve SBUX coffee through Kraft’s Tassimo system. But consumers overwhelmingly chose GMCR’s Keurig system (70% + market share of single serve system) vs. Tassimo (6% share), despite not having the option of SBUX. Additionally, SBUX only holds a 7-8% market share of coffee sold at retail and has been looking for new ways (i.e. Via) to expand that share. Again, we believe SBUX will still make more than $0.20 per k-cup so we doubt it looks at this as a bad bargain.

Private Label 20% Share Statistically Impossible (slides 63 and 66)—The second major driver of his $3.50 estimate is the assumption that non‐licensed private label cups will account for 20% of the total k‐cups sold. This comes from a quote from a “beverage Industry expert”. First, there are NO beverage categories outside of water and milk in which private label consists of 20% of the market. Second, private label only accounts for 10% of coffee sold at grocery, a level that has not deviated more than 1% per year for the past 10 years. That means it would take at least a 10‐standard deviation move to get to 20%; statistically impossible in the next five years.

- Second, Suntrust believes the implication that the company may have committed some sort of accounting fraud is a form of double jeopardy. While they do not outright reject the statement of a disgruntled M-Block employee from a six month old shareholder lawsuit, this statement relates to sales made in December 2009 and neglects to mention that GMCR already restated its financial results for FY08, FY09 and FY10 after a thorough review of the accounting.

In short, Chappell remain as confident as ever in the GMCR story and has moved it to their Top Pick among the 21 stocks he covers.

Notablecalls: This seems big as SunTrust's Chappell is countering Einhorn's claims with solid info and numbers. Not your typical 'We believe blah..blah..blah' type of defend we tend to get from the sell side.

Moreover, Einhorn used their models to present his short case. It appears he may have been wrong.

The stock is down 47 pts from its Sept highs, half of that over the past 4 days as funds managers blew out the name not to look stupid.

Greenberg was on CNBC yesterday, which probably attracted the retail shorts. They will get squeezed today. Big time, I suspect.

Given the nature of GMCR I would not be surprised to see it up 6-7 pts on this, putting 74-75 levels in play.

The shorts will have hell of a time keeping this one down.

I'm call this one Actionable Call (trading) Alert!

Baidu (NASDAQ:BIDU): Take profits after 1000% run - Goldman Sachs

2011-10-20T08:11:00.003-04:00

Goldman Sachs is making a major call in Baidu (NASDAQ:BIDU) downgrading the name to Neutral from Buy with a $165 price target (prev. $175)

According to Goldman fears over a China hard landing and global recession have led to a broad de-rating of the Internet and Education sectors over the past month. Although the sector has already bounced off the early October lows, with their coverage universe up 19% over the past two weeks but still down 12% over the past one month, they believe that volatility and uneasy sentiment over the sustainability of the current rally is likely to persist.

Given concerns over China’s economic slowdown next year, investors’ focus has naturally transitioned to the 2012 outlook from near-term fundamentals, with the upcoming 3Q results season unlikely to be sufficient to sustain rallies in the stocks, in Goldman's view. While they believe a managed, soft landing is more likely than a hard landing, nevertheless the lack of visibility into 2012 will likely limit share price performance.

THE DETAILS (Baidu):

The stock is up 1021% since we upgraded it to Buy on Dec 15, 2008, versus the S&P500 up 41%. While we continue to view favorably Baidu’s improved quality of growth and immense revenue opportunity as e-commerce growth accelerates advertiser adoption, we believe that relative outperformance hereon could be difficult. We consider the weakening advertising environment, which could affect Baidu at the margin despite structural growth drivers from rising online and search advertising adoption, and search as (one of, if not the) highest-ROI advertising channel.

We believe Baidu could be continued to dogged by several concerns: 1) SME tightening concerns, based on reports of lending restrictions plus rising labor costs causing bankruptcies. Looking at Baidu’s top advertiser categories, we would think some segments such as machinery and business services would be more sensitive to the economic cycle and depend on more capital-intensive industries. 2) ecommerce ad spend slowdown. Our channel checks suggest that smaller e-commerce companies are moderating their advertising spend into 4Q11 and likely into 2012 in order to conserve cash, due to heated competition and volatile capital markets hindering fundraising activities.

Baidu will report 3Q11 results on Oct 27 after the market close. We believe risk-reward could be negative going into results, given the strong fundamental momentum the company has already enjoyed boosting near-term expectations, while visibility into 2012 remains limited (with Baidu actually having the lowest visibility among our covered advertising companies owing to its large SME customer base).

Notablecalls: This will likely hurt as Goldman has been one of the most vocal bulls in Baidu. They have played their hand very well and are now telling clients to cash in the chips.

What I like about this call is that the analyst is not pushing her views, but rather attempting to be quite objective. Acknowledging the risks. Saying reward here is not worth the risk. Saying sell ahead of #'s.

This is the type of call that creates selling pressure for days as large clients sell.

I'm thinking BIDU goes below $120 level, possibly towards $118-$119 on this in the n-t.

Range Resources (NYSE:RRC): Cut to SELL, takeover unlikely - Canaccord

2011-10-19T08:39:00.003-04:00

Range Resources (NYSE:RRC) the recent high-flying Marcellus play is getting downgraded at Canaccord to SELL from Hold with a $60 price target (prev. $61)

According to Canaccord, over the past month, RRC has outperformed the sector by over 20% on apparent takeout speculation. They believe RRC reflects a ~30% buyout premium even though a buyout in their view seems increasingly unlikely. RRC trades at a 14x firms ’12 EBITDA estimate – an almost 140% premium to the sector.

THE DETAILS:

As Range should spend ~60% beyond cash flow next year, we see little potential to accelerate value creation further within the current equity capitalization. The bull case is that the company’s assets are worth more in the hands of a better-capitalized enterprise.

However, we believe Marcellus activity is governed by infrastructure, not capital. In southwest Pennsylvania, limited ethane capacity should preclude further acceleration in liquids-rich production until ’14. In northeast Pennsylvania, a material increase in dry gas activity appears incompatible with the acute regional pipeline constraints.

In time, the Utica Shale is likely to compete with the Marcellus, further amplifying regional price degradation and infrastructure constraints. Based on our conversations, one reported suitor may already have too much on its plate given its previous Appalachian Basin acquisition. Additionally, that same reported buyer all but denied the talk.

Range should exhibit 3% production growth in ’11. Our ’12 production growth estimate of 43% is significantly above company guidance of 25-30%.

Notablecalls: RRC has been on tear of lately helped by all sorts of takeover rumours and results that revealed better than expected production.

The thing is up almost 50% from its Oct 4 low.

Now we have Canaccord throwing cold water on the takeover speculation saying potential suitors have already too much on their plates. It appears one one the suitors denied their interest outright.

Yet the thing trades like it's going to be taken over any moment now.

Don't get me wrong, RRC seems like a powerful Marcellus story that may have legs for the next 10 years. It's just that the stock may have gotten somewhat ahead of itself.

One to watch on the short side in the n-t. Could trade below $70 level once the fast money bails.

RRC has a history of doing secondary offerings so I wouldn't be surprised if we saw one with the stock so strong of late.

First Solar (NASDAQ:FSLR): Ticonderoga cuts to Sell with $40 PT

2011-10-12T07:59:00.002-04:00

Ticonderoga's Paul Leming is making a very negative call on First Solar (NASDAQ:FSLR) downgrading the Solar leader to SELL from NEUTRAL with a $40 price target (prev. $117)

According to the analyst there will be acceleration into the downside in both pricing and volume expectations for the PV industry.

THE DETAILS:

No Year-End Rally In Germany - Phoenix Solar yesterday announced sharply lower revenue expectations for 2011 and stated bluntly in their press release that "the hitherto expected year-end rally [in installations in Germany] does not appear to be materializing." Germany remains the single largest market in the world for PV - the lack of a fourth quarter surge in installations and the growing support for still further reductions in subsidies in Germany is devastating news for the PV industry in general and FSLR, in particular. Volume assumptions for 2012 are increasingly at risk.

Pricing Declines Accelerating - Pricing throughout PV value chain appears to be accelerating to the downside; consistent with: 1) Disappointing Q4 volumes; 2) Massive overcapacity throughout the value chain and 3) The reality that still weaker volumes in the seasonally soft first half of the year (2012) will soon become a reality in the industry. Thin-film module prices are now at or below 90 cents/watt - a level at which FSLR's module manufacturing is (at best) break-even after operating expenses (SG&A and R&D).

FSLR's Module Business Heading Into The Red - With the increasing likelihood that polysilicon contract prices will break $30/kg over the next nine months, we believe the most likely scenario for FSLR's earnings in 2012 is for their module business to lose money. The company's absurd segment reporting format (which has their downstream project business exactly break-even each an every quarter) completely hides from investors (and the IRS) where the company really makes its money. Transferring modules into their projects at realistic market prices would show a highly profitable project business (with the backlog of attractive projects largely flowing through the income statement by the end of 2012) and a - today - barely profitable module business.

Our 12-month price target of $40 per share is based on the company's shares trading at 10X its $4 of earnings power in 2013.

Notablecalls: This is the Street low target for FSLR. The chart looks like death. The call reads like death. This appears to be going lower.

I'm thinking $51-$52 in the n-t.

Aeropostale (NYSE:ARO): Actionable Call Alert!

2011-10-11T07:41:00.010-04:00

Jefferies & Co star retail analyst Randal Konik is making a potentially very significant call in Aeropostale (NYSE:ARO) upgrading the teen retailer to Buy from Hold with a $20 price target (prev. $12).

The call is titled 'Upgrading to Buy: We've Seen This Movie Before & We Like the Ending'

Konik highlights 5 reasons why investors should be buying ARO shares here. Most importantly he believes ARO is currently in a similar position to Abercrombie & Fitch (ANF, $67.98, Buy) when the stock reached trough fundamentals back in early 2009. ANF has since seen a turnaround in its business and its stock increase ~165% (vs. S&P up 35%).

THE DETAILS:

Fundamentals Should Improve. In 2011 ARO has seen slowing sales momentum, loss of market share and margin compression as the company lapped peak fundamentals and faced a tough competitive environment. However, we believe the company is now near trough fundamentals and will begin to see improvement in coming quarters as inventories come more in line with sales trends, ARO laps easier comps and some fashion issues are fixed.

We believe ARO margins are currently near trough levels at an estimated ~4% this year, and we expect margins will begin to improve in FY’13 for the following reasons:

1) ARO brings inventory more in line with sales.
2) Comps begin to improve as ARO cycles past easier compares.
3) ARO aims to correct some mistakes in the women’s business
through an improved color palette and fashion.
4) Sourcing cost inflation abates

This Company Is Not Going Away. We continue to believe that ARO's business model is intact and that the company will again prove to be a key teen brand. Further the company's balance sheet and cash flow remain strong despite the tough fundamentals today.

Aeropostale has some of the most productive stores in the specialty retail space. While the sales per square foot metric will be down this year vs. LY, we believe this very high level of productivity shows that the stores are in a cyclical slump, not a secular one.

Aeropostale currently has 5.2m fans on its Facebook page

Sentiment is Already Very Negative. ARO has significantly reduced its earnings outlook this year and the stock is down over 50% YTD (vs. S&P down 5%). Further, sentiment is very negative with short interest near 20% of the float and very few buy ratings on the stock.

Back in early 2009, investor sentiment around ANF was particularly negative. This is illustrated by the high short interest and low number buy ratings among sell side analysts. ANF’s short interest as a percentage of the float peaked at ~19% in April 2009 as investors viewed the brand as largely dead and the company’s long term story broken. Analyst sentiment was also quite negative for ANF with less than 30% buy ratings, ~60% hold ratings and over 10% sell ratings.

What We Expect Will Happen at ARO
Investor sentiment around ARO has become increasingly negative this year following multiple downward earnings revisions and slowing fundamentals. We believe many investors view the ARO story as broken (much like they did for ANF in 2009).

This is evidenced by ARO’s short interest as a percentage of the float which has been increasing and is currently at 16%. Analyst sentiment is also negative for ARO with only 20% buy ratings, over 60% hold ratings and almost 15% sell ratings.

Among our coverage universe, ARO’s buy ratio (defined as the number of buy ratings as a percentage of total ratings) is one of the lowest at 21%. This compares to the average Buy ratio among our group of over 50%.

Risk/Reward Now Compelling to the Upside. With the stock one of the worst performing in our coverage universe, we now see little downside risk and meaningful upside in the coming months as margins and top line begin to recover. As such, we view risk/reward as very attractive at current levels.

Notablecalls: I'm calling this one Actionable Call Alert.

Here are my reasons:

1) Konik has done a very good job in ARO. He cut the name to Underperform on Jan 3 when the stock was trading around $25. Straight down. He kept pounding it all the way, ending with a $12 price target in August.

He upgraded ARO to a Hold on August 16 saying ARO had played out to his thesis with significant top-line and margin erosion YTD.

2) Konik compares ARO to ANF in 2009. A wild ride. But he was right. So right.

3) The call reads well and short interest stands at 18% of float. Sentiment is uber-negative so it won't take much to light up the stock.

I don't see this thing stopping before it hits $13 in the n-t. I suggest you don't chase it too high in the pre market and watch for any pullbacks after open to buy.

Longer term? A potential double or more.

(PS: Posting this around open)

Notable Calls Network (NCN): AM, SFLY & CSCO

2011-10-05T15:54:00.006-04:00

We have caught some interesting (and profitable!) situations at Notable Calls Network (NCN) in the past couple of days:

1) Shutterfly (NASDAQ:SFLY), American Greeting (NYSE:AM)

Apple announced yesterday at their iPhone 4GS event that they will be releasing an app for iOS devices, where users can create and mail 1 to 1 greeting cards.

- Around 1:28 PM ET a particularly sharp & knowledgeable NCN member hit me with the following remarks:

New iPhone, iPad app called "Cards" allows you to make cards to send to people. American Greetings (NYSE:AM) getting hit on this, Shutterfly (NASDAQ:SFLY) also. "SFLY might get killed on this, " he added.

I quickly blasted the comments to NCN. Here what's happened:

American Greetings (NYSE:AM) went from $18 to as low as $16 (2 pts)

Shutterfly (NASDAQ:SFLY) went from $39 to as low as $33.50 (5.5 pts)

Both trades had ample size to be taken.

- We also caught a couple of analyst defends in SFLY, as around 1:55 PM ET Morgan Keegan was out defense of the name saying Apple has been in the photo market for years with iLife and its latest app does not appear to challenge Shutterfly in events and occasions, design choice, or even on price. (Marked green on the chart)

As you can see that also delivered for us.

2) Cisco Systems (NASDAQ:CSCO)

- Around 10:33 AM ET a hedge fund manager primaly focused on technology sector pinged me with the following snippet:

WASHINGTON (Dow Jones)--A bipartisan pair of senators plans to introduce on Thursday a bill proposing a tax break for U.S. companies that bring home foreign profits.

"= CSCO, MSFT, AAPL," he added.

This made perfect sense. Cisco (NASDAQ:CSCO) buybacks! Offshore cash!

- Here's what happened: $0.50 move in CSCO.

Later a NCN member told me he got $0.20 on 150,000 shares from the call. That's $30,000 profit in one trade.

These are the things that make me smile.

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

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.

Priceline.com (NASDAQ:PCLN): Upgrade to Overweight at Morgan Stanley

2011-10-03T08:53:00.005-04:00

Morgan Stanley's Internet team is taking a bold step and upgrading Priceline.com (NASDAQ:PCLN) to Overweight from Equal-Weight while establishing $650 price target.

Firm believes the market is incorrectly assuming that Booking.com has limited growth potential in Europe and APAC due to escalating competition and macro weakness, providing investors with a compelling buying opportunity. Morgan Stanley is raising their estimates above consensus.

The details (in short):

European competitive advantage + secular tailwinds outweigh cyclical risk: Based on our checks, Booking.com still provides the best value proposition to European hotels with the lowest commission rates and largest customer reach relative to competition. Additionally, Booking.com is well positioned to benefit from the ongoing offline-to-online shift in European hotel bookings, which in our mind, outweighs cyclical risk. We model Booking.com increasing its share of the European hotel market from ~8% in 2010 to ~18% in 2015.

Asia Pacific: a new opportunity: Booking.com brings a unique value proposition to Asian hotels with its large European customer base, which local online travel agencies are unable to provide. Additionally, the recent appointment of Darren Huston as CEO of Booking.com (former CEO of MSFT Japan) brings valuable knowledge on effective APAC marketing strategies. We are not modeling Priceline dominating the APAC market, but rather continuing its current growth trajectory, growing market share from ~1% in 2010 to ~5% in 2015.

Valuation: At current price levels, Priceline trades at 11.5x 2012e EV / EBITDA, a discount to Ctrip at 15x and Make My Trip at 30x. We believe Priceline’s multiple will expand closer to its Asian counterparts, as Booking.com gains market share in Europe and Asia Pacific

Notablecalls: Big mo-mo names have been under pressure past days, possibly because of JAT liquidations. As one of the top guys on Notable Calls Network (NCN) notes PCLN has fallen too much too fast and is now getting a size upgrade & target.

PCLN is squeeze material. The market needs to cooperate of course.

Same goes for Netflix (NASDAQ:NFLX) which is getting +ve Research Tactical Idea (RTI) from Morgan Stanley.

"The TRIN closed at 3.89 which is a bit panicky, I think we can get a down to up on the day at some point", another trader notes.

Netflix (NASDAQ:NFLX): Subscriber Churn Stabilizing - Piper Jaffray

2011-09-28T08:22:00.004-04:00

Piper Jaffray is out with some interesting comments on Netflix (NASDAQ:NFLX) this morning noting their 2nd Subscriber Survey shows churn stabilizing in late Sept.

- As a follow-up to their 350 subscriber survey in mid-August, they firm recently surveyed 250 Netflix subs to gauge subscriber behavior. The outcome of the survey, conducted on 9/19 (after the apology email from CEO Reed Hastings to subscribers announcing the Qwikster spin-off), was similar to the mid-Aug survey; however, the number of subs that expect to quit the service is now down to 10% from 15% previously.Piper believes their survey shows that subscriber cancellations are stabilizing after being higher than expected for the majority of Q3. While they continue to expect elevated churn over the next few quarters, the risk of a mass exodus appears to be moderating following their mid-Sept. survey.

Firm reiterates Overweight & $300 PT.

Here's the gist of it:

Couple of points:

1) People planning to quit Netflix is down to 10%.

2) People planning to move to Redbox is down from 56% to 42%.

NO MASS EXODUS.

Notablecalls: Why this is important? I hate to say it but if you look at Olson's mid-August survey closely enough, you will know why. The survey rather cleraly highlighted people's discontent towards the price hikes. It showed people planning to leave NFLX and join CSTR.

I remember arguing about it with a guy sitting next to me at the desk. We both knew the info was material but we didn't have the guts to go against the tape and short the name. What happened was NFLX went down and CSTR went up big. We looked (and felt!) like two putzes. That was August 17 and NFLX was trading around $240+.

Now we have the stock down $100+ pts and Olsen is saying monthly churn won't be as bad as the initial read suggested.

Will it be enough to produce a bounce in NFLX?

I don't know. The chart looks bad & AMZN is about to reveal their streaming service today @ 10:00 AM ET.

Gotta play this one by ear today. Could see $10+ upside, if people really pick it up.

Netflix (NASDAQ:NFLX): Upgrade to Buy at Merriman

2011-09-26T07:01:00.005-04:00

Merriman's Eric Wold is upgrading his rating on Netflix (NASDAQ:NFLX) to Buy from Hold with a $155-175 valuation range.

The analyst notes they downgraded NFLX to Neutral on July 6, the shares have dropped 55% vs. a 15% decline in the S&P 500. At this point, they believe their near-term concerns are more than reflected in the valuation - which no longer gives Netflix credit for its industry positioning and long-term potential. Firm is upgrading NFLX to Buy in spite of the near-term headwinds as their downside 2012 EPS analysis still shows solid growth potential over 2011. They are making no changes to their estimates at this time and see upside to $155-175 using a P/E of 25-28x.

The details (in short):

Downside 2012 EPS scenario still shows growth. In our downside analysis for 2012, we come up with a potential range of $4.49-5.95. The midpoint of $5.22 still represents a solid 21% growth over our current 2011 EPS estimate of $4.33. Given the consensus range of $5.38-9.69, we believe it is apparent that there are numerous drivers that could push results either way. However, we believe our analysis shows a realistic downside scenario that should give investors comfort in Netflix's still strong industry position - and that 2012 solely represents a potential pause before strong margin/EPS growth resumes in 2013.

Starz savings could offset earnings pressures. During 2012 we see three main earnings headwinds that could potentially push EPS below current expectations: 1) migration of DVD-only subscribers; 2) international launch operating losses; and 3) competition causing upward pressure on SAC. However, we believe the $250M in 2012 content savings from the Starz cancellation gives management some wiggle room should they not find
alternative content (or choose not to spend the surplus).

Two biggest drivers firmly in control. At this point, we believe it is increasingly clear that the two biggest earnings drivers in 2012 - marketing and content spend - are firmly in management's control. This is key in that should spending on those two areas not generate positive results, we believe management could easily pull back the reins to maintain solid profitability by catering to existing subscribers instead of pushing to add new ones.

Division split more of a content decision. We understand some believe management's decision to split the streaming and DVD divisions is to better position the streaming division for a sale to a larger competitor. However, even though this may help to improve the sum-of-the-parts valuation multiples afforded by investors, we believe the larger driver was to aid in content negotiations with a smaller number of streaming subscribers driving cost discussions (i.e., lowering the cost) vs. the entire pie (including DVD-only subscribers).

Near-term risks remain in spite of upgrade. Our decision to upgrade to Buy from Neutral today is not based on any improving outlook for the near-term and continue to see risk in subscriber trends through yearend. Furthermore, based on our EPS analysis, we believe there is a morethan- likely chance that 2012 consensus estimates (and possibly our belowconsensus estimate) may need to be reduced. Nevertheless, we believe NFLX shares already more than reflect these risks and should our downside analysis prove aggressive, we could see the shares rebound sharply in 2012 on an improved growth/margin outlook.

Notablecalls: Eric Wold nailed it on July 6th when he downgraded NFLX to a Hold from Buy saying the co would be entering a period of restrained operating margins.

He played the name so well on the way up and looks like he played it even better on the way down. Some of this performance can surely be attributed to blind luck (at least ONE of the analysts among many should get it right) but I do like his style. As was the case with the downgrade, Wold is not being pushy but rather pointing out things may not be as bad as the market suggests. According to Wold, 2012 may bring a sharp bounce-back.

Another thing that caught my eye this morning is that the analyst community is not overly excited about the DISH movie streaming package. It appears to cost more and have way less content that the NFLX offering. So n-t overhang lifted there.

(Now we can all go on and start worrying about what AMZN will unveil in 2 days).

Anyway, I wouldn't be surprised to see the stock lift following the Merriman upgrade. Hopefully another brilliant call for Eric Wold.

Give Kudos when it's due. I do!

Autodesk (NASDAQ:ADSK): Actionable Call Alert!

2011-09-21T08:26:00.005-04:00

J.P. Morgan's Software team is flip-flopping some names under their coverage this morning:

- ADSK, ROVI get upgraded to Overweight while VRSN and DOX are cut to Neutral.

I want to focus on Autodesk (NASDAQ:ADSK). JPM is upgrading the name to Overweight from Neutral with a $40 price target.

According to the firm, ADSK is one of the best franchises in their coverage. It has a substantial market share in a couple of key industry segments (AEC and Infrastructure) and is very competitive in manufacturing design software. The business is highly cyclical and they missed two other good entry points during the downturn in February of 2009 and July of 2010. They believe investors should take advantage of the cyclical pullbacks to build positions in what they consider a high quality software franchise. In addition, this next cycle has the potential added benefit of a move into product suites, a strategy that has helped companies like Adobe breathe large new growth opportunities into its business and something they think could underpin at least a 12% top line CAGR for ADSK over the next five years.

The details (in short):

Move to suites should provide at least 12% CAGR over 5 year horizon
Over the years we have watched a couple of software companies move from offering just point products to bundles of products to ultimately product suites that tightly integrate solutions and at attractive combined pricing. The first most notable company to follow this strategy is Microsoft with the Office suite, but we believe the best comparison for Autodesk is Adobe and its move to suites.

We went back and looked at the penetration rates of suites for Adobe and the impact on revenue and applied this to Autodesk. Result is that we see a base of 12% revenue CAGR over the next five years. Reason we say a base is that we lack perfect insight into the user base at Autodesk for products like Revit where we think there is potential to add another 3-4% to the revenue growth. But we think this view of Autodesk suite opportunity is very interesting given it is based on another software company with a very loyal customer base in Adobe.

Recent market action sets a range in our mind where the stock we think offers $12 of upside if the economy improves against the risk of $4-5 of downside if the economy worsens.

Notablecalls: JPM picked a (very) good day to upgrade ADSK as the August Architectural Billings Index (ABI) published last night showed a surprising jump.

The Architectural Billings Index (ABI) is a survey by the American Institute of Architects (AIA) and is viewed as a leading indicator of nonresidential construction activity. A score of 50 or above indicates an increase in billings. The AIA believes the index has a correlation with nonresidential construction spending 9-12 months into the future.

ADSK is one of the leading providers of software used by architects and engineers. If AutoCAD means anything to you, you're on the right tracks.

In a bit of a shocker, the ABI spiked higher in Aug. The index jumped 6.3 pts from 45.1 to 51.4. That's the biggest m/m change in 5 years (Aug '06). "Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise," said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. "Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it's possible we've reached the bottom of the down cycle."

Here's an illustration from Morgan Stanley explaining why ADSK shareholders track the ABI index:

So there you have it. JPM upgrade and an explosive move in the ABI index should get ADSK moving. The stock should trade towards $30 level in the n-t, possibly surpassing it if the tape holds.

Let's see how it goes. I'm going to call this one Actionable Call Alert!

(PS: I'm posting this right around open)

Mckesson (NYSE:MCK): Rapid Profit Expansion Expected Near Term; Upgrading Cardinal and McKesson to BUY - Citigroup

2011-09-19T08:48:00.004-04:00

Citigroup's Health Care Distribution & Technology is making a fairly big call upgrading both Mckesson (NYSE:MCK) and Cardinal Health (NYSE:CAH) to Buy from Hold.

- Mckesson is added to Citi's Top Picks Live (TPL) list with a $101 price target (up from $90).

New Generic Introductions Should Provide Outsized Profits in C2012 – In the report, Citi examines the upcoming branded to generics wave set to impact the drug distributors beginning in 2011 though the end of 2015. They look at 100+ drugs that currently generate about $90 billion in revenue and their impact on wholesaler profits and margins. Firm estimates that the branded to generic conversion wave will lead to outsized profits and sustainable higher margins for the wholesalers.

The details:

Industry Top Lines Should Begin to Shrink in C2012 – One dynamic of the branded to generic drug conversion cycle is that wholesaler top lines should begin to decrease in 2012. Single source generic drugs can sell at about half the reference drug price and we believe many large customers will buy these generics direct, leading to significant leakage out of the wholesaling channel. We estimate that wholesaler revenue levels could shrink 2% to 8% in the 2012/2013 time period on a reported basis and 5% to 10% on a like for like basis, excluding acquisitions and nondrug distribution businesses.

But Gross Profits Should Expand on Mix – Within the customer base that buys generics from the wholesalers, generic drugs can be 3x to 20x as profitable as their branded drug counterparts. This should lead to both absolute higher profit levels and higher margins for the wholesalers reflecting the shifting mix to generics as a higher percentage of total drugs sold. About 50% of generic drugs dispensed in the U.S. are bought by retailers (or mail order) directly from the manufacturer, meaning the wholesalers will share the generic profit opportunity with other parts of the channel.

Difficult Comparisons Begin in 2H-2013 – We believe an underappreciated dynamic of the branded to generic conversion is the level of profits contributed by single or dual source generics, compared to multisource generics. These limited source generics can produce dollar profit levels that are 3-4x the multisource equivalent. So as many of these drugs move through their life cycles to multisource competition, the gross profit contribution from these drugs will decrease substantially. This should create difficult comparisons in 2013, as drugs including Lipitor, Lexapro, Seroquel, Plavix and Singular should all see multisource generic competition.

Upgrading Cardinal Health and McKesson to Buy, Maintain Hold on AmerisourceBergen – Our revisions make us at or near the Street High estimates on both companies for their F2012 and F2013, implying significant positive revisions which should lead to multiple expansion from current levels. Our target price on CAH goes to $51 from $44 and our target price on MCK is now $101 from $90.

Notablecalls: My poison of choice here would be MCK, as the name is added to the TPL with a very nice $101 price target.

What really makes the call interesting are the catalysts:

- Lipitor is going to launch in Nov 2011, that's 45 days from here. It's the largest drug in the world by sales which should create some excitement among investors.

- McKesson benefits when UNH brings PBM business in house. Of course that won't happen til 2013.

It's a 54 pg. note so the good people at Citi have put work into the subject. The sales will be making a lot of calls today pushing MCK & CAH to clients. Especially MCK since it was added to the Top Picks Live list. Nice defensive name too.

I expect a nice up day for MCK. $78+?

(Posting this after open)

Central European Distribution (NASDAQ:CEDC): Merger Talks with Anisimov, Rosspirtprom? - Citi

2011-09-15T07:59:00.003-04:00

Citigroup's Beverages team is out with some interesting comments on Central European Distribution (NASDAQ:CEDC) noting Russian newspaper Kommersant has a front-page article this morning saying that CEDC is in merger talks with Vasiliy Anisimov and Rosspirtprom to combine their respective Russian assets into a single organisation.

According to the article, the discussion is around Anisimov receiving a 20% stake in CEDC in exchange for his various Russian alcohol assets (86% of Moscow vodka factory Kristal, VEDK distribution business with the exclusive distribution contract on the popular brand “Putinka”). A third party in the deal is reportedly Rosspirtprom, under whose umbrella the combined Russian assets would be managed. According to data in Kommersant, this would potentially increase CEDC’s market share from 14% to ~21%. None of the parties involved have commented on the press report.

According to Citi, this is not the first public speculation over a deal for CEDC and may not be the last given the difficult position the company finds itself in due to a combination of an underperforming operational business and a stretched balance sheet. Previously the stock has reacted positively to press speculation of acquisition (press reports of a $17/share offer by Roman Abramovich in May that an Abramovich spokesman later denied) or to investors building a large stake (Mark Kaufmann issued an SEC filing recently saying he had acquired 9.6% of the company). Last week CEDC’s Board of Directors adopted a “poison pill” giving them power to significantly dilute any potential unfriendly buyer, which could be taken as a sign the BoD has other plans for regaining investor confidence.

While it would be too early to make a fundamental analysis based on the details available, Citi's initial impression is that if such a deal is under consideration, they see more positives than negatives.

– First, this may solve CEDC’s Russian performance issues through the return of key managers who built the core Russian Alcohol Group (RAG) which CEDC acquired in 2008 (but who now, according to Kommersant, work for VEDK and Rosspirtprom). While they do not know the two managers in question they believe this change would be taken positively by the market considering the visible success of initially building the RAG business (and subsequent decline once these managers left).

– Second, the combination of improved consolidated cash flows and the return of these key managers would in our view significantly improve the company’s chances of meeting a major re-financing challenge in March 2013 when $300mln in convertible bonds comes due.

Notablecalls: CEDC has been beaten to bits following 3 disappointing quarters and I suspect that any change in leadership and operations will be welcomed by investors.

Rememeber, this was a $26 stock mere 8 months ago.

Gaining 28% market share in the Russian Vodka market? That's fairly significant. #1 player.

CEDC produced a 50%+ move on August 29 following the Kaufmann stake news which means it's a mover.

I'm guessing CEDC will see $7.50-8.00+ on this.

Here's the Kommersant piece, use Google translate.

Notable Calls on Twitter

2011-09-12T09:26:00.003-04:00

Gentlemen,

I'm going to have another go with this Twitter thing. It didn't feel right the first time around but let's see how it works out this time. Just to give a little taste of what's going on at the Notable Calls Network (NCN) intraday.

http://twitter.com/#!/thenotablecalls

Good luck,

NC

SodaStream International (NASDAQ:SODA): Upgrading To OW As Valuation Has Gone Flat - JPM

2011-09-06T08:40:00.003-04:00

J.P. Morgan is upgrading SodaStream International (NASDAQ:SODA) to Overweight from Neutral with a $50 price target (prev. NA).

With the company reporting roughly in-line Q211 earnings and disappointing full year guidance, the stock has taken a major hit, dropping about 48% while the S&P has been up nearly 5% over that same time frame. While the stock has obviously lost momentum, they continue to believe that the short to medium term growth potential for SODA is strong and that their 2H guidance will prove to be too conservative. With the multiple having compressed from roughly 40x down to about 19x, 17x ex-cash, and with guidance that seems overly conservative, the firm thinks the stock is attractive here.

The details:

Growth is still there despite the conservative guidance. Even though SODA simply reiterated their FY11 guidance, which alarmed a number of investors, we continue to believe that SODA is a growth story. We believe the company’s 2H11 guidance is far too conservative as the company implied top line growth of nearly 31% for Q311, but only 10% growth YOY in Q4. Even though SODA faces a tough +59% comp in Q411, we note that their total US door count at this point (assuming no move into mass) has grown by +86%. In the end, we think that SODA's guidance will prove to be too conservative and we expect the test in mass (and a potential full roll-out) to provide upside to Q4 numbers. We are currently forecasting 16% revenue growth for Q4, but think our estimate could be too low.

At 19x our FY12 estimate, 17x after adjusting for cash, the stock is too cheap. With the stock down more than 50% from its high, we believe that stock is clearly much more attractive, especially as we believe there are no material changes to the story. With the rest of our group having re-rated positively since the market’s turn, SODA is just trading at a slight premium to the group.

US door growth is high, and trends continue to be strong at BBBY. We expect US doors to be up almost 100% yoy in Q4, and while the comps get more difficult, we still expect strong growth. Over the past few weeks we have contacted a number of Bed, Bath, and Beyond locations (BBBY locations are about 13% of US doors) to get an update on SodaStream products. Overall, it appears that machine and flavor sales, along with C02 refills continue to be strong, which is very encouraging.

We rate SODA OW. While the LT growth profile is less than the bulls would like to think, the ST results should be better than expected. Establishing a $50 price target for December 2012 based on 21x our 2013 estimate. As management discusses the conservatism baked into their Q4 guidance, we expect the multiple to move up

Notablecalls: SODA was a $80 stock back in the beginning of August. The recent high-flyer got smashed after management failed to raise guidance on its most recent conference call.

So now it's at $35 trading 19x EPS while growing EPS by 30%+. We saw a couple of tier-2 firms pound the table to bits on the way down, with little success.

Now we have a tier-1 firm out saying SODA is not a broken story and that things are going pretty well for them. JPM actually highlights some checks they made and these came back positive.

That carries some more weight. A lot more weight actually. Short interest stands at over 70%. The valuation is bound to adjust at some point.

One to watch. If this one gets going, the shorts will have one hell of a task keeping it down here.

Tape's drek but the lower we open the better chances we have for an outsized bounce in my humble opinion.

OmniVision (NASDAQ:OVTI): Post F1Q earnings sell-off overdone - JPM

2011-09-02T09:02:00.004-04:00

J.P. Morgan's Paul Coster had a chance to touch base with OmniVision's (NASDAQ:OVTI) CFO, following his return from Asia Pacific region.

- The feedback?

Surprisingly positive.

Coster says he is now convinced that weaker-than-expected F2Q guidance originated in industry-wide weakness in the CE supply chain and does not originate in a head-to-head competitive loss at a Tier 1 OEM. For this reason, he thinks the post F1Q earnings sell-off overdone & recommends buying the OW-rated name.

The details:

Re-visiting F2Q Guidance. The CFO’s commentary is consistent with the earnings call. The weaker-than-expected (by sell-side analysts) F2Q guidance originates in several concerns: 1) slowing PC/Notebook sales, 2) component channel inventory build-up, 3) temporarily weak demand from some OEMs that are experiencing “transitions” (possibly RIM, Nokia), and 4) the later than expected ramp in BSI-2 product.

Head to head with Sony. OVTI’s CFO appeared unsurprised by Sony's August 30th CIS presentation and acknowledges that Sony is a credible competitor at 8MPx. That said, he believes OVTI has only gone head-tohead with Sony once (so far) and claims that OVTI won the resulting design opportunity for a 2012 product.

What about Apple iPhone 5? Consistent with past practice, the CFO will not acknowledge Apple as a customer, whether direct or indirect. That said, the CFO made the point that build lead-time for handset OEMs has collapsed to 30 days (from chip shipment to finished product in retail), and can be crammed down to 15 days under duress. We think this lead-time is surprisingly short, and is consistent with OVTI being well-positioned for the holiday ramp with Tier 1 OEMs (including Apple), notwithstanding the disappointing F2Q guidance. It is, for
instance, consistent with the notion that OVTI introduces BSI-2 8MPx product in late F2Q, and still captures Apple iPhone 5 opportunity if that product ships in mid/late October

What is the problem with BSI-2? The CFO denies that there are design issues with the BSI-2 chip, but acknowledges that the manufacturing process has not yet met the company's expectations regarding consistency. We view this as an engineering challenge that can be resolved in the next month or so.

Notablecalls: OVTI got clobbered a week ago following #'s. The reasons? There were 3:

- The conference call was just awful. I hope OVTI's management is reading this post. Guys, stop beating around the bush and get to the point. I had to read the transcript 3x and I still had hard time understanding what the heck was said.

- Concerns around Apple. It appears this call by Coster does a fairly good job putting some of these in bed. OVTI's CFO is hinting they still have the AAPL deal (we know AAPL & Sony went head-to-head on this).

- BSI-2. That's an issue. I'm not entirely sure TSCM can get this right in the next month or so. (Kudos to FBR on this! Brilliant call!)

All in all, I suspect OVTI may produce a bounce here following the JPM comments. Back above $18?

Tough call to make in this tape, obviously. Why not just buy the effin' market.

PS: I'm posting this after open.

Yingli Green Energy (NYSE:YGE): Tide turning? Avian & Piper upgrading

2011-08-22T08:41:00.003-04:00

Yingli Green Energy (NYSE:YGE) is getting two upgrades from relatively smart operators this morning:

- Piper Jaffray is upgrading YGE to Overweight from Neutral with a $8 price target (prev. $11) noting the company solidly cemented its status as a tier 1 solar PV module supplier, as it continued to gain share through a difficult 1H11 by leveraging its low cost vertically integrated model and very strong brand recognition. YGE saw its shipments rise 36% q/q, while some tier 2/3 module suppliers struggled to maintain flattish shipments. Management expects shipment growth to continue in 2H11 as demand continues to improve, with expected price declines offset by declining costs, enabling YGE to maintain gross margins in the mid-high teens. Additionally,
YGE's PANDA module remains one of the highest efficiency modules shipping out of China today (20% of 2Q shipment, 80mw). Piper believes the significant pullback in the stock presents an excellent opportunity for investors to own one of the leading vertically integrated low cost module suppliers.

- Avian Securities is upgrading YGE to Positive from Negative with a $7.50 price target, representing 43% upside from current levels.

The seasonal trade in solar stocks will likely be compressed to just a few short months given the earlier demand delay caused by the subsidy uncertainty in Italy, but Avian finds YGE as a current outlier to the group that is likely seeing the early signs of the seasonal momentum coupled with increased market penetration. Following a decent Q2 report with both upside to revenue and EPS, the forward outlook was reaffirmed and is good enough to ease our near-term demand concerns. Avian notes waiting to upgrade after the PVSEC show in early September would put them in with the rest of the herd, but they hear the early signs from management’s comments that demand is increasing now for the seasonally strong solar installation period. The firm finds now is an opportune time to ride the wave of the solar trade, and to take the first dip with shares of YGE.

Notablecalls: Couple of points here:

- Piper's Zaman cut YGE back in March helping his clients avoid some of the slaughter in the name.

- Avian only recently picked up coverage in the space but their guys are well respected. I'm told by Avian they are definitely transitioning from a very negative opinion on the entire sector, to some positive opinions ahead of the seasonally stronger 2H.

That makes the YGE call potentially more significant. The co seems to be best-of-breed here (lowest cost producer etc.) and that's exactly the type of stuff you may want to be buying.

YGE has been crushed, so I expect a potentially explosive move off lows. The $6 per share level seems like the first logical stop in the n-t.

Research in Motion (NASDAQ:RIMM): Misek calling bottom

2011-08-19T07:23:00.003-04:00

Jeffco's Peter Misek is upgrading Research in Motion (NASDAQ:RIMM) to Hold from Underperform while raising his target to $25 (prv. $22).

- I would probably have ignored the Hold rating from Misek but going over Marvell Tech's (MRVL) conference call transcript I noticed two interesting tidbits:

* MRVL was calling for RIM revenue to stabilize in H2

* Sehat Sutardja Marvell CEO had the following comments on the conf call:

I think investors should not discount RiM. We continue to work closely with RiM in delivering new solutions. They will make the product to look really, really nice, better performance as well. So, don't discount that. Don't discount RiM at all.

Here are the details:

We believe the share price has finally found a floor after months of misexecution, delayed products, and shrinking market share. Our reasons for the more positive view are: 1) patent values based on recent transactions point to higher sum of the parts; 2) build plans have stabilized; 3) focused on releasing QNX before expectations; 4) removal of WebOS. We are upgrading RIM to a Hold from Underperform and raise our price target to $25.

New value for patents: Based on the recent MMI acquisition by GOOG, Nortel acquisition by the consortium, and stock price activity of IDCC, it is clear there is significant interest in the market for patents. By our calculation RIM spent over $5B in acquiring and developing its patent portfolio but we RIM could monetize its patent portfolio for approximately $2B since many of the patents are uniquely security-related or cross-licensed.

Build plan stabilization: our checks indicate that builds plans have begun to stabilize.

Rush to release QNX: we believe that RIM will likely dump features to release new QNX based devices before expectations. While it may not be the superphone we hoped for, we believe it is slightly positive as it demonstrates to investors the ability to execute on time. Chance to become third ecosystem increased: The removal of HP WebOS as a competitor increase the low probability that RIM as an ecosystem vendor may recover.

Salvage value revisited: our scenario analysis assumes a breakeven hardware business, a subscription business run as a cash cow, a monetized patent portfolio, and a $700M restructuring charge. The share price calculation then is $3B net cash + $2B (patents) - $700M restructuring charge + subscription NPV all divided by 524M shares outstanding. Our new $25 target implies a 2.5% annual rate decline and 3% annual subscriber decline.

Blackberry Music Service: RIM is seeking to leverage the popularity of BBM by integrating a music service. According to CNet the company has already signed a deal with at least one of the "Big 4" record labels. We believe this is awfully late relative to competitors, but given the popularity of BBM, it may help the company gain more traction with the consumer market.

Valuation/Risks
Our $25 target is ~8x our FY13 ests (2-year range 7x-18x). Risks: 1) transition to new OS is poorly executed; 2) share loss in both consumer and enterprise.

Notablecalls: Misek turned negative on RIM at the end of April when the stock was still trading in the high $40s, slashing his price target way below the Street average. If my memory serves me correct his $22 price target was the Street low. Until this morning that is.

Bernstein's Ferragu & Misek were the two notable bears in RIM. Now both have told their clients to cover.

I think this coupled with the MRVL CEO comments, upcoming QNX launch and low expectations could produce a bounce in the name in the n-t. Barring a general market crash of course.

Needless to say, executing the trade will be difficult.

Notable Calls Network (NCN): Wedge Partners on BIDU

2011-08-16T08:03:00.003-04:00

Notable Calls Network (NCN) caught a very nice call in Baidu.com (NASDAQ:BIDU) yesterday. We were super-early on it, which is just the way we like it.

- Around 10:30 AM ET a contributing member of NCN told me to get short BIDU fast as Wedge Partners, independent equity analysis firm with a focus on the technology and media industries was making a big negative call in the name.

A minute later I received the details:

VERY NEG BIDU (Confirmed just now by analyst in Beijing).... Just now (literally 10 mins ago) on CCTV2 a popular TV show, Baidu was exposed by CCTV about providing unreliable advertisement to consumers, accepting ad for healthcare companies without business license and etc.

Remember, at the end of 2008, Baidu's stock price more than halved by the 2-days continuous attack from CCTV. Baidu's stock might be materially impacted by this short term.

Knowing how potentially significant this call could be, I swiftly distributed the details to other Notable Calls Network (NCN) members. This was exactly the type of info people were looking for.

- Over the next 30 minutes the stock started breaking down as more details emerged:

1) BIDU provided links to fraudulent websites for consumer goods and travel agency services. Consumers who followed the BIDU search results to these sits and made online payments were victims of fraud as the online travel agencies and consumer goods companies were not real.

2) The show highlighted how BIDU’s own sales force (Wedge's Lin Juan actually believed they are probably BIDU’s distributor sales folks) actually advised and helped companies who did not have qualifying licenses help fake or bypass the issue.

3) The show also mentioned and brought up the entire 2008 scandal related to healthcare companies who did not have proper licensing.

Link: CCTV exposure caused by Baidu search site users provide false deceived

- By 11:30 AM ET the stock was down 7 pts. A hefty intraday trading gain.

PS: Morgan Stanley is out this morning with a cautious call on BIDU saying they expect some pressure on the stock price, as CCTV's claims appear more widespread this time (vs. 2008), covering more than only healthcare listings.

The firm has issued a Negative Research Tactical Idea saying the share price will fall relative to the country index over the next 30 days. They estimate that there is about a 70% to 80% or "very likely" probability for the scenario.

The stock is trading around $140 in pre market, another 4 pts lower from yesterday's close.

Obviously, Wedge Partners deserves a Kudos here. They beat the rest of the Street by a mile.

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

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.

MetroPCS (NYSE:PCS): Bargain hunting - Upgraded to Outperform at Bernstein

2011-08-10T08:34:00.004-04:00

Bernstein's Craig Moffett is telling his clients to go bargain hunting in the Pre-Paid Wireless space this morning.

- Moffett is upgrading MetroPCS (NYSE:PCS) to Outperform from Market Perform with a $16 price target.

He writes:

The sell-off in telecom stocks has been nothing short of breathtaking in recent weeks, with many stocks in the sector down 40% or more. The pre-paid wireless operators have been particularly hard hit. Since July 1, a month before it reported Q2 results, Metro's stock price has declined -47.5%. Leap Wireless is down a mind-bending -58.9%. The S&P 500 has fallen -12.5% during the same timeframe.

Sector concerns are not unwarranted (we ourselves have been among the most bearish). But of all the stocks that have sold off in the telecom sector, MetroPCS looks to us to be uniquely oversold, and we believe it presents the best buying opportunity. In this report we take a fresh look at the pre-paid players. We’ve scrubbed our models from top to bottom, refreshed our valuations, and closely examined the segment’s recent performance.

- The pre-paid segment appears less profitable than it once had, as the margins associated with smartphones are lower than the voice-only margins of old. But the pre-paid operators continue to gain share, and the prepaid market does not look like it is fundamentally broken. Pre-paid and reseller captured 60% of industry net additions in Q2, 390 bps better than Q2 last year, and MetroPCS remains by far the industry's standout performer on a footprint-adjusted basis.

- By Bernstein's estimates, Metro's forward EBITDA multiple (just 3.9x 2012 EBITDA) is the lowest it has ever been on an absolute basis, and surprisingly, it is lower than Leap’s.

- In contrast, Leap Wireless’s outlook is far more uncertain, and its valuation far less flattering. Given its enormous effective leverage, optimistic scenarios could yield spectacular upside. But firm's valuations suggest that even in their base case scenario, there could still be additional downside to the name, and more pessimistic assumptions yield outcomes with no equity value at all.

Of all the stocks that have sold off in the sector, MetroPCS looks to be uniquely oversold, and Bernstein believes it presents the best buying opportunity for intrepid investors.

By most measures, MetroPCS posted Q2 results that only modestly missed investor expectations; certainly, its business shows no sign of existential distress. Indeed, it appears well positioned to benefit from a continued trade-down from high priced post-paid wireless plans into its discounted pre-paid plans. PCS's numbers were unquestionably far better than that of unlimited pre-paid peer Leap Wireless’s. To be sure, both MetroPCS and Leap missed consensus net additions, but Metro by a far smaller margin. And irrespective of the miss, Metro’s net additions were still a healthy positive number; Leap’s were - 103K (voice net adds of 29K and broadband net losses of -132K, compared to expectations of 89K and - 34K, respectively). And gross additions at MetroPCS actually beat expectations, in a clear sign of sustained strong demand (Leap's gross addition results, by contrast, fell short). ARPU was also close to expectations, missing by a narrow $0.17, while Leap actually outperformed, beating expectations by $0.46.

All in all, these results felt like ones that would normally have dinged MetroPCS’s stock price by several percentage points, but probably not much more. (Leap’s results were worse, and given their volatile trading history one might reasonably have expected a bigger drop).

As anyone who follows the space is surely aware, things did not exactly pan out that way.

.....

To be continued. This is a 32 pg. note so I can only pass on the broad stroaks.

Notablecalls: So Moffett is telling people to buy PCS, which has according to him has gotten unjustly punished.

Given he has been among the most cautious on the Pre-Paid space his change of heart will likely generate enough attention to get PCS moving up.

I'm guessing upwards to $10 in the n-t.

This may prove to be a significant call.

The Market - Bounce?

2011-08-09T07:19:00.001-04:00

Pick your favourite high-beta names because it seems we're going to have a big bounce today

Notablecalls: Water pistol to head call!

Just a heads up - An indicator we follow technically just shot off a positive reading suggesting a bounce - Avian

2011-08-04T11:20:00.004-04:00

I know we generally don’t put out technical analysis but I thought this was interesting enough to highlight.

Avian’s 10 Week Hi-10 Week Lo indicator fired off its extremely oversold reading of -556. As you can see on the below chart, whenever the red line spikes higher, especially above 400, the market is at a tradable low. The indicator does not shed any light on whether this bottom is a major or minor one. But it should provide a tradable bounce.

Notablecalls: Sometimes we have to rely of stuff like this.

Intermune (NASDAQ:ITMN): Next to blow up?

2011-08-04T08:01:00.003-04:00

Jefferies is out with a rather well-timed call on Intermune (NASDAQ:ITMN) saying it could be the next Dendreon (NASAQ:DNDN) to blow up.

Ahead of Esbriet launch starting this September in Germany, they view ITMN shares as likely to come under further pressure given likely slow uptake (vs. consensus high expectations) and potential financing risk (cash enough thru 2012). On very modest sales of Shionogi's Pirespa in Japan and competitors in the works, high expectations for Esbriet may need to be adjusted near term.

- Firm is lowering their target to a Street low of $18 (from $24) & is reiterating Underperform rating.

New drug sales are increasingly dictated by drug efficacy/cost-benefits, not necessarily by a lack of other approved drugs or by the large # of eligible patients, particularly in the current HC cost-sensitive environment. Bull case for ITMN is that there is no alternative for IPF patients; so once launched, Esbriet would be rapidly/widely used, and eligible IPF patients would continue to be on the drug once started. However, given the very modest efficacy of Esbriet, the firm views uptake would be slower and adherence is debatable due to side effects (nausea ~20%, rash ~20%, dyspepsia ~11%, photosensitivity reaction ~11%, placebo-adjusted). While ITMN estimates Esbriet-eligible IPF patients in EU at ~70K, the real question is how many will actually receive Esbriet and continue to stay on the drug. Based on the disappointing launches of several biotech drugs, in jeffco's view it is hard to be convinced why the Esbriet launch would be drastically different.

Lowering their already below-cons Esbriet sales estimates by ~33% & their PT to $18; consensus #s need to come down significantly, in our view. Jefferies notes they now assume ~$400M/$400M in peak EU/U.S. annual sales for Esbriet (vs. ~$670M/$530M previously. For 2011/2012, consensus of $10M/$105M (vs. Jeffco's of $2M/$35M) implies ~880/~2,330 patients being treated with Esbriet (vs. their ~176/780 pts) at assumed $45K/pt/yr.

Estimated current cash balance of ~$200M may not be sufficient through 2012 by our estimates, thus posing financing risks. ITMN currently has ~$85M in convertible debt due in 2015 (coupon rate/conversion price of 5%/$18.88), with a long-term debt-to-capitalization ratio of ~33%.

Notablecalls: With Dendreon (DNDN) crushed last night on lower-than-expected Provenge ramp the timing of this call couldn't have been better (or worse, depending on one's point of view).

JPM's Biotech analyst Cory Kasimov notes this morning: 'As if investors needed another reason to “short the launch” of one-product biotech companies, DNDN just served up the ultimate case study.'

Kasimov's right, investors have seen too many one-trick ponies get slaughtered after analyst estimates collide with reality. Esbriet with its $45K price tag & low efficiency fits right in.

Now Jeffco is saying ITMN may end up being another disappointment. This means stock will likely be taken to the back of the woodshed today and shot.

ITMN could be down as much as 7-10% today, putting 28-29 levels in play.

This could serve as a meaningful overhang for quite some time, so the stock could move lower than that.

PS: I'm posting this at around market open 9:30 AM ET

AGP, CNC - Texas Medicaid Awards Largest in History

2011-08-02T07:35:00.003-04:00

Texas announced the awards for its highly anticipated $10 billion Medicaid managed care program. The public MCOs dominated the RFP and captured most of the new contract awards.

This was the largest, and therefore the most highly anticipated Medicaid RFP in the history of the Medicaid program. Analysts believe the overall size of the Texas market after full implementation of this expansion will be roughly $12 billion, more than doubling its previous total. The operational start date is March 1, 2012, which suggests that the full earnings potential from these contracts will not be felt until 2013.

There are two major winners:

1) Amerigroup (NYSE:AGP) - AGP will remain the largest Medicaid plan in Texas and should generate around $1 billion in incremental revenue from the Texas expansion. Upon completion of the expansion, AGP should generate over $2.5 billion in annual revenues in Texas Medicaid.

2) Centene (NYSE:CNC) - Centene will generate around $1.5 billion of incremental new revenue in Texas expansion, thus continuing its hot streak as the company also recently won new contracts in both the Louisiana and Kentucky RFPs.

Here are some estimates of EPS impact across Tier-1 firms:

- Deutsche sees $0.40-0.60 2013 EPS impact for AGP, $0.55-0.83 for CNC.

- J.P. Morgan sees eventual run-rate EPS impact for both CNC and AGP to be about $0.50 per share additive

- Credit Suisse notes assuming a pretax margin of 3%, they estimate the following annualized aftertax EPS impact: AGP +36c, CNC +22c

- Barclays estimates that CNC will generate an incremental $0.25 in EPS in 2012, and an additional $0.54 in total run-rate EPS once the new members are fully phased in. They estimate that AMERIGROUP will generate an incremental $0.22 in EPS in 2012, and an additional $0.40 in total run-rate EPS once the new members are fully phased in.

Notablecalls: Considering AGP, CNC trade 10-11x EPS and the EPS impact is around $0.50 for both companies in 2013, both stocks should be up 3-4 pts (im sure some of the impact was already priced in).

Could be some more for AGP as the stock got crushed following earnings last week. I see Citigroup is raising their target on AGP to $76 (from $71) this morning.

Difficult to call any trades here but it's where the action will be this morning, I suspect.

Investment Technology Group (NYSE:ITG): Deep Value! Upgrade to OW - JPM

2011-07-27T08:51:00.004-04:00

J.P. Morgan is upgrading Investment Technology Group (NYSE:ITG) to Overweight from Neutral with a $16.50 price target calling it a deep value stock.

- Upgrading ITG to Overweight – Unloved and Largely Ignored, But Management and the Board Have Options.

- With some help from ITG's balance sheet this could be a $18 stock, according to JPM.

With the stock underperforming materially in 2011, particularly since preannouncing soft 2Q11 results on July 12,
2011, the firm see management having capital management options that could be particularly positive for investors. The core of JPM's thesis is two fold –

1) ITG has the free cash flow to borrow against a cash rich balance sheet and buy a materially percentage of its stock.

2) An expense reduction program gives ITG meaningful flexibility should equity volumes remain subdued, but meaningful earnings potential should volumes rise.

JPM believes that ITG’s mgmt. is well positioned to be more aggressive in returning capital to shareholders, taking advantage of the recent steep drop in its stock. Over half of ITG’s ~$12 stock price is in cash – they estimate ~$7 per share. While much of this cash is trapped to support the business, ITG’s mgmt. has only been returning moderate capital to shareholders. However, with share price down 27.5% in 2011 and Private Equity in the sector, they think that pressure is on mgmt. to create additional shareholder value. Borrowing $170mn (1.5X trough 2Q11 EBITDA) and using the proceeds to purchase shares at $13 would increase ITG’s 2012 EPS by 30%, driving the stock to $18, at 12X earnings.

Management has listened to shareholders in the past, initiating a stock repurchase program following encouragement of D.E. Shaw in 2007. Given a significant decline in ITG’s stock price, they see the potential for the CEO and Board of Directors to take stronger action to deliver shareholder value.

ITG fundamentals challenged in 2Q11, but earnings outlook acceptable given cost cutting initiatives. ITG’s earnings are tied to equity trading commissions, which were solid in 1Q11, but struggled in 2Q11. However, mgmt. announced a meaningful expense reduction program in early July to offset recent softness in industry trading volumes. This program should not only mitigate weak volumes should they persist into 2H11, but increases ITG’s leverage to better trading volumes in a seasonally stronger 1Q12.

According to JPM, ITG’s market share of total NYSE and Nasdaq shares traded has increased from 2.75% in the beginning of 2010 to 3.3% at the end of June 2011.

ITG – A Deep Value Stock
Firm thinks ITG is especially inexpensive. After peaking earlier this year at ~$20 per share, the stock has declined as both industry volumes sank and as the perception of ITG’s customer mix deteriorated from higher fee paying mutual fund customers to lower fee paying brokers and lower touch customers. ITG stock has fallen 27.5% in 2011, including a 21% decline earlier in July following its earnings preannouncement.

ITG Trades at 10x JPM's 2012 Estimate of $1.18, FCF Yield Is An Attractive 13%. ITG trades at 15X what they expect will be trough earnings in 2011, and an inexpensive 10X times their 2012 estimate. Similarly positioned company, such as Knight Capital is trading at 8X JPM's 2012 estimate. However, ITG has a much higher FCF yield relative to Knight Capital – ITG's 13% based on 2Q estimates vs. Knight's 8%.

ITG Has No Sell-Side Support – No One on the Sell side Has a Buy on ITG! JPM believes there are a number of data points to suggest ITG is being ignored by the investment community. One example is that of the nine analysts that provide research coverage on ITG, there are no ‘Buy’ ratings – eight analysts have “Holds’ and one has a ‘Sell’. Firm notes that according to Bloomberg, 7% of the float is held short.

Notablecalls: What do you think will happen to a $500M company (a small-cap!), that nobody loves & seems to have forgotten about when a Tier-1 firm like J.P. Morgan comes out swinging calling it a Deep Value play with a hefty 50%+ upside price target.

It goes up! Big time.

I'm guessing +7-10%, putting 12.50-13.00 levels in play in the n-t.

PS: I'm posting this at Market Open 9:30 AM ET.

Bridgepoint Education (NYSE:BPI): Warburg files S-3 - 35 million shares

2011-07-25T09:01:00.003-04:00

Bridgepoint Education (NYSE:BPI) may offer an interesting trade in the n-t after Warburg Pincus, majority owner & founder filed to sell their 35 million stake in the company.

Here's the S-3 filing

Here are some points why this may be a major event for the company:

- Bridgepoint Education Inc. (BPI) was formed in 2004 by current CEO Andrew Clark and Warburg Pincus to establish a for-profit post secondary education provider. The IPO was priced at $10.

Warburg & co can be considered 'smart money' & seeing them cash in their chips should be considered as a red flag.

- Warburg owns 34.6 million shares or about 57% of the fully diluted shares outstanding.

While short interest stands at a whopping 72% of float, the float is about get significantly larger. Current float stands around 18M shares.

I think the recent raise in BPI stock price can be attributed to a short squeeze. As you can see from the Bloomberg chart, short interest has been declining lately, while the stock has been going up.

All in all, Warburg filing is likely to have created a significant overhang for the stock in the near-term.

Notable Calls Network (NCN): InterDigital (NASDAQ:IDCC)

2011-07-21T14:24:00.004-04:00

We caught a nice mover on Notable Calls Network (NCN) this morning:

InterDigital (NASDAQ:IDCC) has been on fire ever since the Nortel wireless patent estate was auctioned for $4.5 billion. InterDigital happens to hold patents related to the fundamental technologies that enable wireless communications.

The stock has gone from $35 in mid-July to a high of $82.50 as of this morning on speculation Google, Apple among others may be interested in buying the company for its patents.

All in all, it's been the main hype name that traders love to trade around on any new bits if info.

- This morning, around 8:00 AM ET a senior member of NCN brought to my attention that Peter Misek, an analyst at Jefferies & Co had an interesting call on IDCC saying Apple could potentially buy the company. What was even more interesting was the fact he thought IDCC patent estate would be worth up to $10 billion for Apple. IDCC's market capitalization was around $3.1 billion.

This was clearly market moving material, so I quickly distributed a short summary of the call to our wonderful members:

IDCC (Peter Misek) - InterDigital portfolio could be worth up to $10B to Apple = $200 per share!

InterDigital's patents could save Apple $3-$10 per handset and could substantially increase the price of the low-cost Android phones launching in H2:11.

- Sellers were scarce, so one had to buy up 4-5% to get decent fills. But as you can see from the chart it was well worth it. The stock went up another 10 pts.

You can probably imagine the profits some people have from this morning.

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

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.

OpenTable (NASDAQ:OPEN): Reduce Estimates on Slowed Subscriptions and Soft Spotlight - Benchmark

2011-07-13T09:10:00.002-04:00

Benchmark is out surprisingly cautious on OpenTable (NASDAQ:OPEN) lowering their Q2 revenue estimates on increased competition and weakness at Spotlight, OpenTable’s deals product.

- Firm maintains Hold rating and $90 price target.

The details:

OpenTable appears to be facing more competition domestically from Urbanspoon’s RezBook, Livebookings and Eveve. CityPages recently reported that two notable restaurants in the Twin Cities dropped OpenTable. These restaurants apparently switched to Eveve, a European competitor that has 300 restaurants, due to lower cost and more flexibility. Competition may be slowing OpenTable’s restaurant growth. Our checks indicate OpenTable added meaningfully fewer restaurants in 2Q compared with prior quarters. We reduce our 2Q estimate for restaurant subscription revenue from $12.8 million to $12.4 million. This could affect reservations as well.

We believe at Spotlight, OpenTable’s deals product, revenue was down sequentially in 2Q11. For 2Q11, we now estimate Spotlight’s revenue at about $800,000, below our prior $1.5 million estimate, and down from $1.2 million in 1Q11. While there was an improvement in Spotlight revenue from April to June, no single month in 2Q11 was higher than March’s total. Large markets such as San Francisco (down an estimated 46% sequentially), Los Angeles (down 43%) and New York (down 34%) drove the projected soft result.

The National Restaurant Association reported weakening restaurant trends for May, the latest available data. The Restaurant Performance Index dropped 1% sequentially, from modest expansion to modest contraction. This was the first time in six months that the Index signaled contraction. Expectations for the next six months also declined slightly.

Consensus 2Q11 revenue, EBITDA and EPS are $35.5 million (45% y/y organic growth, $13.0 and $0.27 (91% y/y growth). Our revenue estimate drops from $36.3 million to $35.0 million. Our adjusted EPS drops from $0.32 to $0.29.

European competition remains a concern. Livebookings appears to have 8,700 restaurants in 23 countries, and seats one million diners monthly, mainly through its website bookatable.com. Livebookings main markets are the UK and Germany where it has about 5,000 and 2,000 restaurants, respectively. These are also OpenTable’s main European markets.

OpenTable closed at 62x and 32x 2011E adjusted EPS and EBITDA with about 50% average annual growth in both.

Notablecalls: Benchmark's Clayton Moran is making a potentially significant call here. If his checks are right, OPEN's huge valuation multiples are about to compress.

The weakness at Spotlight doesn't sound good either but seems to be well telegraphed by now. Still a big part of OPEN's valuation, though (based on Groupon-like multiple)

Imagine OPEN reporting slightly below consensus #'s on August 2. Ugh.

Note that 3 weeks ago PAA Research, a small shop with interesting ideas & a good track record published a very negative take on OPEN. They called it a short with a $55 price tag noting competition was quickly eating away OPEN's total addressable market. The stock is up 5 pts since.

Very volatile name so adjust your risk accordingly.

PS: I'm posting this around 9:30 AM ET.

Lam Research (NASDAQ:LRCX): Samsung's Gift to Semicon; Upgrade to Buy - Citi

2011-07-11T08:23:00.008-04:00

Citigroup's Semiconductor Equipment team is making a significant call on the space, turning bullish again after several months of being very bearish. Title of the call is "Samsung's Gift to Semicon".

- Lam Research (NASDAQ:LRCX) is their new favourite pick in the space, after being on Citi Top Pick Live Sell list since April 6. They are upgrading LRCX to a Buy with $62 price target (prev. $43).

ASML and KLAC get upgraded to Hold from Sell. NVLS & AMAT remain at Hold.

Not only has LRCX meaningfully underpeformed the group in 2011 and back to historically attractive valuation levels, but should also be a significant near-term beneficiary from Samsung, according to Citi.

The details:

Samsung is finally coming back; increasing CQ3 from -10-15% to flattish — Citi's most recent checks indicate that Samsung is finally coming back to the table to place many of the orders pushed out in April. Specifically, the firm now thinks Samsung will take 20k wsm capacity for Line 16 phase 2 NAND ramp and ~30k wsm tool upgrades for Line 15 DRAM shrink, both of which should now order and ship in CQ3. They estimate this is nearly $1B of the ~$1.5B previously pushed out – a swing factor of ~15% on a wafer fab equipment order run rate of ~$6.5-7B for CQ2.

Overall, we believe this amounts to nearly ~$1B that should come back into CQ3, which should provide ~10-15% of the upside for CQ3 orders/shipments for the major front-end names. This essentially “fills the gap” between what the firm thought was previously a down 10-15% CQ3 and now looks more flat.

Importantly, Citi believes this should start to come through this week at the Semicon/WEST tradeshow and be reflected in surprisingly good sentiment for CQ3 relative to current Street expectations.

- Orders now below normalized levels, baking in $27B WFE — Citi estimates CQ2 wafer fab equipment (WFE) orders were back to ~$27B/yr run-rate, down from >$40B in CQ4:10 (fueled largely by ASML) and below the ~$29B/yr they consider “normalized”. Not only is this decline consistent with the correction magnitude in ‘04/’05 (the last supply-driven correction, ’01 and ’08 were demand-driven where GDP slowed meaningfully), but $27B WFE would be down ~15% from the $32-33B still suggested by equipment companies and bottom-up capex analysis for 2011.

Citi's sector view — While supply has ramped in face of end-market demand questions + IC inventory headwinds, the sudden and meaningful order pullback has mitigated risk while Street sentiment now very negative. Looking to 2012, it is hard to see a big down year given rising capital intensity, lack of memory over-spend, and INTC “changing the game” in the foundry segment. Their tgt increases are based on a new higher normalized mkt size due to higher capital intensity. LRCX/TER/FORM remain top ideas.

Notablecalls: Citi's Timothy Arcuri caused 8% intraday drop in LRCX on April 6, when he issued a Top Picks Live Sell rating on the name, claiming Samsung decided to push out shipments with the company.

April 20 results & guidance by LRCX confirmed his suspicions sending the stock further down.

Goldman Semicap analyst upgraded LRCX on May 5 but the selling pressure was so intense the stock failed to hold gains even for the day.

- Now we have Arcuri coming out saying his uber-negative thesis is now reversed. Following recent underperformance & Samsung resuming orders LRCX is his favourite name in the group.

If that's not a big call I don't know what is.

Plus we have Semicon/WEST the biggest Semi event starting tomorrow July 12. Citi thinks this could ignite the group.

All in all, I suspect LRCX will trade up markedly in the n-t. It will almost certainly produce a 3-5% upside move from open but given the significance of the call this could push the stock up for several days. So buying the pull-back could work here as well.

Buying the other names in the sector may prove to be somewhat more tricky as we have UBS & Merrill both out with cautious pre-Semicon comments lowering their cap-ex growth rates for the space. They are obviously lagging behind Citi checks wise.

Tape's drek so adjust your risk accordingly. It seems we're in a state of panic this morning. Quite the change from Friday's jolly bounce.

PS: I'm posting this at around 09:30 AM ET.

Google (NASDAQ:GOOG): Investment Ramp, Uncertain ROI, Downgrade to EW - Morgan Stanley

2011-07-08T07:22:00.004-04:00

Morgan Stanley is downgrading Google (NASDAQ:GOOG) to Equal-Weight from Overweight with a $600 price target (prev. $645).

- Google is spending to innovate in social / local, retain talent, and to drive user adoption of key products, but those investments have uncertain ROI / payback periods. Morgan Stanley is reducing their PT to $600 (from $645) and C2012e EPS to $34, below consensus of $40.

Details:

Debate #1: Will margins decline from here? Yes. Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome & other Google products, we expect EBITDA margin to decline in C2011 / C2012.

Google is now hiring at a blazing pace (1,900+ net hires in CQ1) and is likely to attain its goal of making 2011 its “biggest hiring year in company history” – per Alan Eustace, Google’s SVP of Engineering & Research“. As a result, we believe the company is on track to hire 7,000 employees this year (an increase of 19% from year-end C2010), up from our prior estimate of 4,000 net additions.

Debate #2: Will “newer” businesses drive near-term revenue outperformance? No. We believe the consensus is too optimistic on the net revenue contribution of newer businesses, such as DoubleClick, YouTube, AdMob, Android Market, and mobile search. In 2011, we expect search & contextual ads to contribute ~90% of Google’s net revenue.

Debate #3: Will investments in local eCommerce and / or social pay-off? Too early to tell. We are encouraged by early progress of Google Plus and Google Offers, but Google faces stiff competition from incumbents who have first mover advantage. The pay-offs of such endeavors may be longer-term.

Google’s approach to capturing markets is to grow users / market share first, and monetization (profitability) second. We expect them to take a similar approach with Google Offers and Google Plus, which should limit near-term financial contribution even if both products prove successful. Further, these businesses appear to be scale businesses whereby the highest margin profile accrues to the market share leader. If Google is not able to capture a leadership position in the market, it may not enjoy EBITDA margins as high as in its core business.

As a Result, We Are Reducing Our Estimates
We are reducing our profitability estimates (now significantly lower than consensus) due to the following: 1) Google’s aggressive hiring plans, 2) rising salaries due to a competitive hiring environment, and 3) increased advertising spend to drive usage of new / existing products.

Our new CQ2 / C2011E EBITDA estimates are $3.44B / $14.5B, roughly 4% / 5% below consensus estimates. Our revised CQ2 / C2011E operating EPS estimates are $7.45 / $31.44, approximately 5% / 7% below consensus.

Notablecalls: Morgan Stanley has been a Google Bull since 2008. So that makes the call potentially a significant one.

LinkedIn (NASDAQ:LNKD): Initiating Coverage with a SELL and $45 price target - Capstone

2011-07-07T07:02:00.003-04:00

Capstone Investments is making the call none of the other Wall Street firms want to make:

LinkedIn (NASDAQ:LNKD): Initiating Coverage with a 'SELL' and $45 price target - Price isn't the Only Risk

- The 18 pg note accuses the online recruiting firm of creative accounting, lower-than-advertised user base, high fixed cost business model and poor corporate governance.

All this they say, comes with a bubbly valuation not seen since 1990's. According to Capstone, their Street low $45 price target could prove to be too optimistic as the company fails to execute its ambitious business plan & insiders start dumping the shares. IPO lock-up expires in November 2011.

'... LinkedIn is an online professional identity and recruitment tool. Sprinkle on the "social media" moniker and in the Internet Bubble 2.0 you can price an IPO at $45per share, or 34% higher than the price talk midpoint, and the watch the stock rise to $94.54 - although it has been as high as $122.70 and as low as $60.14 over the sex weeks since LinkedIn's stock offering - to give this break-even business a $93.4 billion market cap. ... '

Paul Meeks, CFA at Capstone

The PDF file is copy-locked so I can only show you the Summary page of the note:

Notablecalls: There are two reasons why LNKD has only Buy ratings from major Wall Street firms:

- Merrill, JPM, Morgan Stanley & UBS were the underwriters. They need to keep their clients (both sides) happy.

- Facebook. The biggest IPO in recent memory is expected some time in 2012. Everyone wants a piece of the action and they are not going to get it by issuing Neutrals (or god forbid Sells) on other Social Media names.

That leaves the door open for Capstone to come in with a seriously scary story and a price target that should send people selling at least in the n-t.

I expect LNDK to trade down today, possibly to the tune of 5-10%, putting $89-85 levels in play.

Omnivision (NASDAQ:OVTI): Actionable Call Alert!

2011-07-06T08:24:00.000-04:00

FBR Capital Market's Semiconductors team is out with a call on Omnivision (NASDAQ:OVTI) that I suspect could be a game-changer for the stock in the n-t.

- First I would note that FBR doesn't officially cover OVTI (yet!) but seems they stumbled upon the info while doing their Apple supply chain checks.

The firm discusses their iPhone/iPad estimates going up etc.. until it reads this buried in page 2:

We still expect the iPhone 4S (codenamed N94), to have an 8 mega-pixel camera though we hear reports that OmniVision may be having technical difficulties with its new CMOS sensor, possibly risking its iPhone socket supplier status. As reported previously, Apple’s iPhone 4S refresh has replaced Infinieon’s baseband processor with Qualcomm’s processor. Also of note, with 72.5M iPhones set for production through the first three quarters of 2011, 100M iPhone builds again seems reasonable for Apple this year. Given our new iPhone build estimates, for 2Q11 we now estimate Apple can sell a maximum of 21M units, and for 3Q11 we now estimate Apple can sell a maximum of 27M units (though actual sales will likely be lower as Apple builds more internal and channel iPhone inventory before holiday sales ramp in 4Q11.

Omnivision possibly out, Sony may pick up the slack. Our contacts tell us that Omnivision may have missed Apple’s commercial production deadline for products utilizing their BSI-2 architecture, and thus may have lost the lead supplier status for the image sensor socket to Sony. Omnivision’s BSI-2 technology is the world’s first 1.1-micron pixel architecture allowing for low-light sensitivity and accurate color reproduction for better overall image quality. Manufactured through Taiwan Semiconductor, it is built using a 300 mm copper process at the 65 nm node. However, we understand that yield rates at TSM have thus far been unacceptably low for commercial viability, and that the deadline for inclusion into the next iPhone has passed. Therefore, Sony could become Apple’s primary supplier of 8 mega-pixel CMOS image sensors for the next iPhone, with OmniVision possibly being a backup supplier. Many believed that Omivision would capture as much as 90% share of iPhone production, which may turn out to not be the case.

Notablecalls: FLASHBACK: February 23, 2011 - Sony could win all of initial iPhone 5 procurement orders - Baird

Baird's Tristan Gerra made a bold call just 2 days ahead of earnings saying Apple could potentially single source iPhone 5 sensors from Sony. This resulted in a 3 pt (15%) drop for the stock. OVTI was a 26 dollar stock back then.

The analyst was proven seemingly wrong as OVTI guided July qtr tad above guidance, implying all was good at Apple. The stock surged 10 pts as disgraced shorts fled the scene.

The consensus view became that OVTI's OmniBSI-2 technology would be in the iPhone 5 & Sony would at best be a me-too supplier.

That's until today.

FBR's ever-wonderful Semi team is saying OVTI is having real problems with the BSI-2 architecture as yields are way lower than expected. Low yields is the key to this call. You see, OVTI is converting its sensors to BSI technology because of better yields and lower defect densities.

I can't stress this enough but if OVTI cannot mass produce BSI-2 architecture, it means they can't get their stuff in the high end devices like the iPhones & iPads. That would mean consensus #'s are way too high.

Someone call the homicide unit because that would mean murder for the stock.

FBR could have it wrong with their checks. Maybe it was just a patch of BSI-2's that had bad yields & TSM being best in the business can turn it around for them. But with the stock 10 pts higher from where the concerns first surfaced, one can expect a rather painful reaction.

I would not be surprised to see the stock down 10% or more today after the FBR call makes the rounds.

That would be $31.50 or lower in the n-t.

Actionable Call Alert!

Netflix (NASDAQ:NFLX): Downgrade to Neutral - Merriman

2011-07-06T08:19:00.004-04:00

Netflix (NASDAQ:NFLX) Merriman downgrading to Neutral on near-term margin pressures and limited upside to target

Netflix ran up to a new all time high yesterday on news of expanding into Latin America and Carribean. As such they confirmed what had been expected since earlier this year - that the most likely region for international expansion would be be Latin America. This is believed to be a very attractive market of broadband subscribers with expanding wealth due to less competition than in Europe or the UK. Netflix will offer its streaming-only subscription plan into 43 Latin American and Carribean countries during 2H11.

Merriman estimates that there are more than 40M broadband subscribers throughout Latin America and the Carribean, and given the 4% broadband subscriber penetration already achieved in Canada during the first 9 months, they see 5-10% penetration rate within the new regions during the first year. This would yield 1.9-3.8M subscribers and $180-360M in annual revenues(assuming $8.00/month subscription price).

Netflix seen to be entering a period of restrained operating margins. Although on the Q1 conference management increased their anticipated 2H11 operating losses from this year's international launch to $50-70M from $50M, the analyst believes the projected Y/Y declines in operating margins for at least the next year could begin to negatively impact investor perceptions of growth trends and appropriate valuation multiples.

Company could see increased international spend guidance as management has already increased the anticipated operating loss range with a likely desire to lock-up key content to gain a head-start over potential competition it would not be surprising if management increased the operating loss guidance again. While this decision would be positive for Netflix's long-term growth prospects, the analyst believes it would cause a near term shock to current earnings estimates and the valuation multiple.

Merriman's current valuation range of $300-330 is based on a P/E multiple of 45-50x FY12 EPS estimate (or a 1.0x PEG ratio). After the 89% increase in NFLX shares since their upgrade they now see less than 10% potential upside to the target valuation range. The analysts upgrade was based on the prospects of international expansion, which has now played out.

The analyst is recommending swapping into CSTR as a play on the ongoing transition within the physical home video segment along with a wild card on the pending announcement around Redbox's digital strategy and partner. He recently boosted the EBITDA estimates above guidance and consensus following a thourough analysis of 2011 DVD rental potential and he sees additional quarters of revenue/EPS upside near-term. Using a very conservative 5.5-6.0x FY12 EBITDA estimate multiple he believes CSTR shares can reach a valuation range of $72-79 (27-40% upside).

Notablecalls: You probably won't believe this but Merriman can actually move this name. Merriman had the Street high $300-$330 valuation range when the stock was in the low $200's.

What I like about this call is that it isn't too pushy. The analyst has been right but he is now becoming more hesitant regarding the upside. Tough yoy compares coupled with high valuation is not the best combo for a mo-mo stock.

Lots of trapped shorts there but the stock should come down on this. I'm thinking 285-280 range in the n-t.

This is the last thing people expect it to do, right?

Right?

First Solar (NASDAQ:FSLR): Home run on loan guarantees - Credit Suisse

2011-06-30T06:49:00.003-04:00

The call of the day comes from Credit Suisse Solar team as they comment on First Solar (NASDAQ:FSLR) following an Associated Press report saying the company has won conditional loan guarantees for 3 of their Solar projects.

Here's the link: APNewsbreak: Solar loan guarantees announced

- CSFB is raising their CY11 EPS from $9.00 to $9.68; CY12 EPS goes from $9.92 to $14.03; their CY13 EPS goes from $8 to $12.62; CY14 goes from $3.70 to $9.29.

These are all hefty raises, now way above consensus.

- CSFB is raising their target on FSLR to $135 (prev. $100) noting the stock could over shoot to the $140-$150 level today to reflect longevity of earnings through 2013.

Here are some of the details:

Bottomline – raising estimates and target price. FSLR already had the Agua Caliente conditional loan guarantee in the bag, and had loaded the bases by submitting additional loan guarantees on three other projects to the DOE. Now the company has literally knocked the ball out of the park – with the Associated Press reporting that the DOE is expected to announce on Thursday that $4.5bb in additional conditional guarantees will be issued for FSLR projects.

Details: 1) $680mm for AV solar ranch; 2) $1.88bb for Desert Sunlight; 3) $1.93bb for Topaz. We had noted in several notes in the past, including most recently on Monday, that all three were in the running for a loan guarantee and the DOE had recently likely concluded the credit review of these projects. We had also noted that this week would be crunch time for additional loan guarantees. We were modeling FSLR will get one additional guarantee, but had noted all three projects were in the running. Getting all three additional guarantees is a positive surprise to our expectations, and we are therefore raising our estimates and target price.

The additional longevity of earnings at this high level is a key change in the equation – which could result in the stock trading up to $140-$150 levels. We are therefore using a simple DCF now to arrive at a new price target of $135 on the stock. Eventually the bear thesis will need to revert back to oversupply such that the panel business possibly loses money due to competition – but this is an issue the market may not focus on in the very near term.

Notablecalls: This is easily the most significant piece of Solar news this summer. These FSLR contracts were signed around 2008, which means the terms are very favourable in terms of pricing vs. today. The DOE loan guarantees provide very cheap financing, which further amplifies the profitability of the projects. The upside could be $5-6 in EPS in 2012/13.

Most analysts were expecting 1 or 2 of the projects to get DOE backing but NONE expected a slam-dunk (all 3) decision we got today.

Solar has been extremely out-of-favour sector evidenced by the whopping 46% short interest in FSLR. I would call this an explosive combo.

I expect FSLR to trade $140-145 range today. Yes, I'm expecting a $10-15 pt move.

U.S. Steel (NYSE:X): Deutsche upgrades to Buy; Goldman calls bottom in space

2011-06-29T07:49:00.008-04:00

Steel stocks are getting very supportive comments from two tier-1 firms this morning:

- Deutsche Bank is upgrading both U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS) to Buy from Hold with $56 & $17.50 price targets respectively.

Firm notes they could think of many appropriate titles for this report, but in a nutshell, they now view steel dynamics and investor sentiment as nearly the inverse of early 2011 when they downgraded the sector. Their upgrade is largely based on valuation, but they also believe that steel prices are nearing a 'floor'. Buy AKS and X in anticipation of steel price and demand inflection.

Steel correction healthy (necessary) and prices poised to bottom
DB says they viewed the HRC push to $900/st as negative, and reported average prices have declined to $740-750/st. Meanwhile, 'unreported' prices are below $700/st and inline with prior 'correction' expectation. They now forecast that benchmark US HRC prices will average $830/mt in ‘11 ($753/st) and $772/mt in ‘12 ($700/st); increased ~1% vs prior. Also, firm's demand outlook is unchanged as they expected NA growth of 7% and 5% in '11-‘12 and global gains of 8% and 6% respectively. Catalysts: steel prices and apparent consumption; seasonal trade could come earlier than normal

Deutsche believes that steel prices are approaching cost support (marginal cost) and could ultimately push supply out of the market. Scrap prices have been more supportive than expected in recent months and trade contacts suggest that nearterm (ex July) prices will be flat-to-up. Further, downtime announcements are likely forthcoming which they’d view as positive, if weakness persists (add’l declines of $100+/st are possible). Also, global steel prices are to become more supported including in China where they believe inventories and steel prices are near bottom. On demand, they expect the 'buyers strike' to end soon...here they find it interesting that recent conversations with consumers have focused on supply risks and when asked, most contacts recognize that end-demand remains 'ok. Also, they anticipate some improvements in industrial activity in 2H (ex. autos), and net-net, the firm thinks the seasonal steel 'trade' could begin earlier this year.

Valuation: risk-reward more favorable; AKS & X to Buy
DB notes their PTs imply average upside of 27% and steel stocks are near the low-end of trading ranges. AK Steel and US Steel shares are near levels from late ‘10 when US HRC was below $550/st. Also, their EV/t analysis shows that AKS and X are 'cheap' vs peers and historical trends, and their 'what's priced in’ analysis suggests the market is assuming below avg margins - AK appears particularly attractive using this tool. Regarding AK, the firm hasn't recommended it since early ‘10 and it has been a laggard on cost/other concerns.

- Goldman Sachs is out with a Scrap Steel sector call noting their latest channel checks indicate an upward bias (around $20 per ton) for July scrap prices, which is highly unusual considering seasonality and indeed very positive for providing cost support to steel prices. Almost all the input material costs (iron ore, coking coal and scrap) are either stable or rising going into seasonally slow summer months which underscores our view that steel prices could be close to a bottom.

Steel demand could also surprise to the upside in 3Q
Firm notes they had earlier estimated that the industry utilization rate would move close to 80% in seasonally strong spring period and then come down as we head into the summer months. Although this did not occur, they are pleased to see a steady state of demand and utilization rate hovering around 75%. Goldman believes that a typical summer slowdown in demand could be of a much lesser magnitude this year as auto industry is recovering at a rapid pace from the Japanese earthquake related supply chain disruptions.

Mini-mill margins at tipping point; steel prices should see support
Goldman notes that historically they have seen that when steel price reaches close to the cost of the lowest cost producers (mini-mills), it generally signals a bottom. And if there is some support from demand, prices generally bounce back. With expectations of busheling scrap to be around $530 per ton in July, they estimate mini-mill cost at around $680 per ton for HRC. At current level between $700 and $740 per ton, the firm sees very limited room for further degradation in steel prices. Barring any major downward correction in scrap prices in coming months, they believe that steel prices could bottom at above $700 per ton in this cycle, a very positive outcome considering that last year’s bottom was at round $540.

Notablecalls: Deutsche almost caught the recent top with their Steel sector downgrade, so with the firm now turning positive, people will likely take notice.

Regarding Goldman, this is a Scrap Steel call but as many industry watchers probably agree, scrap tends to lead the sector moves. I very much enjoyed reading their mini-mill comments.

So, with two tier-1 firms calling the bottom in Steel names, we can expect a strong upside move in the names today. The whole sector should be up.

My poison of choice is U.S. Steel (NYSE:X) which I think is the best mover in the group. I think the stock can do $45+ today.

Apple (NASDAQ:AAPL): Buy Apple for Summer Rally - Morgan Stanley

2011-06-27T07:18:00.005-04:00

Morgan Stanley is making positive Research Tactical Idea call on Apple (NASDAQ:AAPL) this morning calling for a summer rally in the name.

- Deutsche analyst Chris Whitmore is also very positive this morning raising his #'s on AAPL.

Recent dip a buying opportunity. After meetings in Taiwan last week, they expect Apple order cuts to ease and iPhone / iPad production to begin ramping aggressively from August through year-end. Firm views the recent valuation pullback as a buying opportunity in light of the following factors, and issued a Research Tactical Idea on AAPL along with this note.

1) Post-Japan earthquake production constraints have eased, putting upward pressure on iPad shipments.

2) With improved component supply, Apple is negotiating price cuts with some suppliers, potentially boosting margins modestly in the June quarter and more in September.

3) Apple’s next iPhone will begin production in mid to late August and ramp aggressively into C4Q.

Shifting iPhone units into C4Q; CY11 estimates unchanged: To reflect a late C3Q iPhone launch, the firm shifts 2 million units from the September quarter to the December quarter but their full year estimate of 72 million units remain unchanged. An early September iPhone launch would drive upside to their lowered September quarter estimates, in their view.

Lower priced iPhones and TV are additional mid-term catalysts: Apple is forecasting a large iPhone unit increase in CY12 on the back of new products and potentially lower price points. Morgan Stanley also believes Apple is in the early design stages for a TV, which could add $19 billion and $4.50 of annual revenue and EPS longer-term.

- Deutsche Bank is also out positive on Apple this morning saying they expect the co to refresh the iPhone in September with two SKUs; namely the iPhone 5 and a lower-end iPhone 4S handset. With Nokia and RIMM struggling, the time is right for Apple to aggressively penetrate the mid range smart-phone market (i.e. $300-500 category) to dramatically expand its addressable TAM and market share.

Deutsche believes Apple could offer an unlocked iPhone 4S with a prepaid voice offering (parallels the 3G data plan vs. WiFi for iPad) which would drive significantly greater penetration into its 1.5B+ subscriber reach (2/3 are pre-paid) through 200+ carriers in 98 countries. They estimate an iPhone 4S model priced at $349 would likely be incremental to Apple’s corporate gross margin suggesting it can push down-market without negatively impacting profitability. The firm also believes near term iPhone 4 demand is tracking ahead of their previous expectation due to: the addition of 20+ new carriers in the Q, strong white iPhone uptake and wider global distribution.

Deutsche believes Apple’s international channel and related penetration opportunities are under appreciated and are raising iPhone and EPS estimates (DB at 74M iPhones in CY11 and 90M in CY12 vs. prior 71M and 85M, respectively). Although they expect Apple to move more aggressively into the midrange smartphone market, it is not currently captured in these estimates. Looking forward, they expect the upcoming iPhone / iOS upgrade and channel/carrier expansion to support strong iPhone demand over multiple quarters. Firm reiterates their Buy rating and $450 PT.

Notablecalls: It is certainly interesting to see two tier-1 firms out quite positive on Apple after a period of cautious-sounding data points. Needless to say, both are known bulls in the name.

Morgan Stanley has given their analyst teams a way to make shorter-term calls, called Research Tactical Ideas (RTI). For example, in AAPL's case they are calling for the stock to trade up in the next 60 days, giving this view a 70-80% or very likely probability of happening. That's a fairly bold statement & should generate some interest.

Also notice how the analyst is embracing the possibility of an Apple TV.

There are two interesting bits of info in the Deutsche call:

1) DBAB is calling for both unlocked iPhone 4S & a brand new iPhone 5. Lately, the consensus has shifted towards the view that there will be no lower-end iPhone. So there could be some upside there.

2) The firm is raising their iPhone ests for 2011 to 74M, which is actually above Morgan Stanley. I'm sure many of you know Morgan Stanley has been THE iPhone bull.

I think there could be some n-t upside in AAPL. RTI's usually generate immediate buy interest, so barring a market crash, the stock could be on the way up today.

I'm thinking $332+

Feedback appreciated.

United Continental (NYSE:UAL): Watch the Airlines in the n-t

2011-06-24T09:01:00.003-04:00

I think traders should keep the Airline names on their radar this morning after United Continental (NYSE:UAL) reported weaker-than-expected RASM #'s last night.

here's the link to the PR

Here are some comments from tier-1 firms this morning:

UBS: United’s implied June revenue guidance was below expectations and when combined with other guidance suggests Q2 consensus EPS numbers are about $0.30 too high. Tomorrow will likely be a bad day for the airline stocks after a good, oil-driven day today. Given United’s June revenue, Delta’s double digit RASM growth guidance for Q2 looks very challenging.

Our 12-month PT falls to $36 from $39 based on ~6x EV/EBITDAR. Our 2011 EPS est. drops to $4.00 from $4.42. Maintains Buy.

Morgan Stanley: UAL guided to 2Q11 PRASM growth of ~8.8%, below sell-side ests. for 10%-11%. Though it was clear June PRASM growth would be lower than UAL’s ~14.5% May result, guid. implies June growth of 4%-5%, below our est. of a high-single digit result. Despite ~6pts of one-time adjustments in June, we believe UAL’s outlook will negatively impact investor sentiment as it will fuel demand risk concerns. That said, given low valuations, the recent selloff, and the demand skepticism we have heard from investors of late, we believe investors’ ests. were below the sell-side, which should dampen the neg. reaction. Furthermore, the possibility of stronger results from UAL’s legacy peers remains a potential positive catalyst.

(It's also worth noting MSCO is closing their positive Research Tactical Ideas on LCC & DAL, due to UAL news)

Barclays: June RASM from UAL was a disappointment. We underestimated revenue reconciliation payments UAL would have to make to alliance partners at quarter’s end, but we still find performance a bit disappointing. Our forward estimates reflect revenue deceleration on declining fuel and a recent softer economic climate. We now believe that deceleration developed earlier than expected, though recent feedback from DAL suggests less deceleration. We expect UAL and the group to be soft on the heels of this announcement, but at earnings multiples in the low single digits we would be buyers of material weakness, especially in UAL and DAL

Deutsche: We are lowering our June Q diluted EPS estimate for UAL from $1.75 to $1.50 (vs. consensus of $1.60) - a reversal of a change we made three weeks ago - as PRASM for the month of June came in lighter-than-expected (e.g. mid-single digit PRASM gain). We were expecting a 12% gain in PRASM for the month of June; based on quarterly guidance issued by the company last night, we estimate the gain to be closer to 5%. Also, we are lowering our full year 2011 EPS estimate from $3.35 to $3.10 (vs. consensus of $3.83).

Overall, no change to our longer-term investment case for Buy-rated UAL. Furthermore, the stock is fairly inexpensive on our more conservative forecast as its enterprise value is currently trading at 5.0x and 4.8x our 2011 and 2012 EBITDAR forecasts, respectively. As such, should the stock be under pressure this morning, we would see it as an opportunity for investors to add to their position.

Notablecalls: While not a disaster, UAL's #'s tell a story of possible deceleration in the sector. It looks like the group has been reluctant to move higher even in face of significantly declining oil price. Now that we have bad news, it appears the group is vulnerable to the downside. Analyst consensus clearly stands too high.

While total gambling on my part, it LOOKS LIKE oil is getting ready for a bounce today. That should add some fuel to the fire.

I haven't received anything from J.P Morgan's Airline God Mr. Baker this morning, so he must still be positive on the group.

I'm thinking UAL will be down 5%+ today. Maybe there's a trade there.

PS: I'm posting this on market open.

Advanced Micro Devices (NYSE:AMD): BREAKING NEWS - CEO FROM IBM

2011-06-21T09:14:00.003-04:00

Advanced Micro Devices (NYSE:AMD) may have major news, possibly as soon as today:

Bright Side of News reports: The next CEO of AMD comes from IBM

Quote: While we are not in the liberty of disclosing the name of the new CEO (if the person in question signs that contract), the negotiations did not took a long time and are being finalized as I write these lines.

If the contract gets signed this or next week, expect to see the announcement coming before AMD posts its second quarter results - expected to take place on July 21, 2011 at 2PM Pacific/5PM Eastern.

Here's what the analysts have been saying past month or so:

Bernstein, June 7: This is one more potential 2H catalyst that could positively impact AMD's shares, coming on top of the launch of Llano and Bulldozer, and (hopefully) the arrival of a new CEO.

UBS, June 10: New AMD CEO has significant opportunity and challenges We believe a new CEO appointment could occur within the next 2 months, which could be a catalyst for the stock, especially given attractive valuation, as it removes a major source of ongoing uncertainty. To sustain any near-term rise, we believe the new CEO needs to tackle 7 strategic issues with servers as the most important in our opinion, followed by disciplined execution on the APU strategy. We remain Neutral given execution risks and at least until the new CEO articulates his vision.

FBR, June 16: We still have concerns about AMD’s lack of strategy (tablets and mobile) and leadership, though a new CEO hire could drive shares higher, depending upon the person. We are raising our rating on AMD from MP to OP and our target from $10 to $12, based on a higher 15x target P/ E multiple (including stock compensation, excluding net debt and interest expense).

Notablecalls: AMD stock is down 25% in the past month or so underperforming even its larger peer INTC. And now we have news out saying their new CEO is coming from IBM.

I think one couldn't ask for a better hire. IBM grooms the best of breed technology execs that can adapt to any business environment. This is what AMD needs. This is what the analysts have dreamed of.

I expect AMD to trade up markedly today, once the news gets out. AMD up 5-7%+ today? Am I too optimistic?

Home Health: Downgrading Sector View; Cutting Estimates; See More Downside - Baird

2011-06-20T09:02:00.003-04:00

Baird's Health Care team is downgrading Home Health Sector to Underperform this morning saying they would not buy any home health stocks and expect the tape/news flow to get worse. Furthermore, 2012 estimates look to be 20%-30% too high, multiples stretched relative to the 2-3 year trading range and in general, the group looks vulnerable. Admittedly, sentiment is horrible, but we think it gets much worse before better, expect 2Q misses, lowered guidance, a very negative CMS proposal (will surprise many) and increasingly worry about the sector's exposure as a doc-fix/debt ceiling pay-for.

- AFAM cut to Underperform, $21 target (prev. $32)

- LHCG cut to Underperform, $17 target (prev. 27)

- GTIV cut to Neutral, $23 target (prev. $35)

- AMED target is cut to $26 (prev $35)

The details:

This is not a negative "call" on known issues of the F2F reg, but rather: 1) issues stemming from documentation which will lead to higher bad debt reserves, 2) we see significant risks in the upcoming CMS proposal and 3) valuations look stretched, we do not believe M&A is coming and the group is very vulnerable as doc-fix/debt ceiling pay-for.

Street too complacent on 2012 CMS proposal. We are struck with the large number of investors who do not see the risks to the 2012 coding creep. Our DC lobby contacts struggle to see any scenario in which the -3.79% coding creep does not grow and/or potentially point to future reductions. CMS will absolutely consider 2009 "coding" in the 2012 rule. Both our outside consultant and the industry's lobby believe CMS has identified ~3.3% of "increased coding" from 2008-2009. Thus, if CMS does not spread out cuts ('11 reg said they wouldn't), we could easily see a ~7% case-mix adjustment. Our revised 2012 numbers assume a 5% rate cut, which we believe is not aggressive.

Based on our recent conversations with many private companies and industry contacts, we believe the industry on average is struggling to obtain proper documentation for approximately 10%-25% (in some cases much more depending on what month) of home health SOCs (starts-of-care; e.g., admissions). Ironically, the Street has obsessed about the "volume" impact from patients that potentially would not meet the 90 days prior to or 30 days after rule, but based on multiple conversations with our network of industry participants, we have uncovered a substantial problem in obtaining the "proper" documentation from patients that actually meet the 5 requirements of the reg. As a result, we understand some providers may book ~100 bps of additional bad debt expense to account for the uncertainties related to obtaining F2F documentation for these patients (i.e., the "collectability" of these revenues). We do not believe investors are aware of this issue and it could pressure 2Q and 2H11 results.

Lowering estimates, group looks vulnerable. Our 2012 EPS estimates are now 20%-30% below the Street. We firmly believe the CMS proposal surprises on the downside probably in mid-July, which is before earnings. We expect all providers to likely miss and lower not just for the F2F "volume" impact, but due to higher reserves as providers are struggling to get documentation for patients that meet the encounter requirement. Home health stocks likely oscillate near 10x earnings (we fear could be worse as HH is likely to be included in the doc-fix/debt ceiling), thus we worry about another 20%-30% sell-off in the coming months. With this research note, we are revising our sector suitability rating to Higher Risk.

Notablecalls: This is going to hurt. Looks like Baird has done some real digging and uncovered additional problems in the sector. Many of the names appear cheap on surface but if one adjusts for the new info from Baird, they suddenly don't look that cheap anymore. It's been a tainted sector for a while.

This is a fundamental call & although many of the names carry hefty short interest I expect 5-7% downside moves in LHCG & AFAM.

GTIV and AMED will also get hit but less so.

Molycorp (NYSE:MCP): Bounce?

2011-06-20T07:05:00.004-04:00

Molycorp (NYSE:MCP) is getting bumped at two firms this morning:

- J.P. Morgan is out with a very positive note raising their estimates and price target on the Rare Earths miner. Firm's new price tag is $105 (prev. $87) to reflect the continued rise in rare earth prices and their belief that MCP can operate significantly below its planned capacity and still realize sharp increases in shareholder value.

In fact, the firm estimates MCP could operate at 50% of capacity and see current spot prices drop 40% and still generate an NPV of $105/share. They think the stock will start to move higher as four misconceptions about MCP and the sector are ultimately dispelled: 1) MCP is struggling to achieve market prices, 2) ramping production from MCP will bring on too much supply post 2014, 3) China will ultimately reverse its production and export tightening measures, and 4) new supply outside of China will chase prices and eventually bring on too much supply.

Raising EPS. JPM is raising their EPS estimates (2012 to $5.93 from $5.25, 2013 to $14.48 from $12.51, and 2014 to $27.01 from $22.45) to reflect the continued increase in rare earth prices. In just the last month, average oxide export prices are up 22% and 195% YTD. In China over the last month, average domestic oxide prices are up 81% and 472% YTD.

- Piper Jaffray is upgrading MCP to Overweight from Neutral with a $73 price target (unch) following the stock's ~40% correction since early May.

Piper believes the pullback overly discounts the risk that rare earth prices will fall precipitously – which they believe is unlikely to occur over the next 6-12 months. They maintain their $73 price target and view continued restrictive policy actions from China, positive 2Q results, and progress on the funded capital project as potential catalysts for the stock. Less conservative pricing assumptions in our model could present upside north of $100/share.

Recent pullback creates an attractive entry point. MCP remains a highly controversial stock, fueled by the sharp run-up in rare earth pricing over the past year and uncertainty around Chinese policy on quotas and tariffs. Piper fully expects rare earth prices to fall in the future as additional supply comes online – they have incorporated an average price reduction of 60% by 2013 in their model – but looking out over the next 6-12 months, they see little change to industry fundamentals. At current valuations, they believe the market is pricing in 1) more severe price cuts in the 70%+ range AND 2) no additional volume from Phase II of the company's project plan which will double production capacity in 2014. Piper believes these assumptions are overly pessimistic in at least the near term.

Near-term catalysts present potential for upside. In the next several weeks, China will unveil its quota policy for 2H11. They expect the rare earth quota level for 2H11 to be set consistent with 1H11 levels, which will continue to strain global supply. Piper believes the release of the quota policy will once again revive fears of China's restrictive policies on rare earths, which will support near-term pricing. Additionally, they believe MCP is poised to report strong 2Q results with production levels showing a healthy q/q increase and pricing expectations on Lanthanum have been set more appropriately following the 1Q confusion.

Notablecalls: I think these calls serve to push MCP higher in the n-t. The stock is down 30 pts from its highs and ripe for a nice juicy bounce.

Short interest stands at close to 20%.

I would suggest you take a look at other Rare Earths names as well, namely Avalon (AMEX:AVL) & possibly Rare Elements (AMEX:REE) as the calls are likely to create buy interest in the whole space.

I'm thinking MCP can generate 7-10% upside. Am I too optimistic?

PS: I personally think none of these analysts have any credible insight into what's really going on in China. So this is just a sentiment trade.

Novatel Wireless (NASDAQ:NVTL): Actionable Call Alert!

2011-06-15T08:39:00.005-04:00

BMO Capital Markets analyst Tim Long is making a potentially a very significant call on Novatel Wireless (NASDAQ:NVTL) saying business at Verizon is accelerating markedly.

- This is likely to result in way higher-than-consensus #'s. Firm rates their Outperform rating and $12 target.

A recent round of checks on LTE MiFi sell-through at Verizon has been positive. BMO believes Novatel’s MiFi has emerged as the preferred LTE device in their checks. Verizon appears to have stopped selling CDMA modems and hotspots in all markets, and this alone should increase NVTL’s ASPs and revenues. Firm estimates that a normal handset upgrade rate woul dresult in significantly higher revenues than their above-consensus estimates. BMO estimates upgrading Verizon’s existing 6 million Mobile Broadband Subsis worth more than $1B in device revenue. They are above consensus for both3Q and 4Q as they think the Street underestimates the impact of higher ASPs,a return to a normal upgrade rate and the expanding addressable market. They also believe that embedded revenues will start ramping and that Novatel and Sierra could take 50% of the embedded laptop/netbook market.

Channel Checks
Checks with Verizon stores in several cities since the launch of the Novatel LTE MiFi in late April indicate that it is selling well. Several store reps BMO talked with discussed selling at least one MiFi per day and all reported a significant increase over prior quarters. Almost all of the store reps they talked with are pushing the Novatel MiFi over the Samsung hotspot owing to performance issues with the Samsung device, Novatel’s MiFi brand, and better form factor. These sentiments were echoed at the Verizon website where reviews of the Samsung device were overwhelming negative. Many reviewers received several replacement Samsung devices before switching to the MiFi, which they had no issues with. BMO also expects the Novatel LTE USB modem to become available in Verizon retail stores shortly, as the LTE-only LG modem has been discontinued. Previously the Novatel modem was available only on line. They believe that Verizon is upgrading existing CDMA mobile broadband customers for free, even for customers who bought a CDMA MiFi within the past several months.

VZ Revenue Assumptions Likely Conservative
BMO models Verizon’s mobile broadband subs, upgrade rate, net adds (which it recently began reporting) ASPs, market share and dongle/MiFi mix to estimate Novatel revenues at Verizon. Firm's base case assumes that net adds slow to 300,000 per quarter, upgrade rate increases to 9%, NVTL has 75% share of MBB at Verizon, MiFi is 70% of the mix, and ASPs decline by 2% per quarter. These assumptions result in 2011/2012 revenues of $348 million/$504 million, basically double the current estimates in their model of $186 million and $200 million.

Where Their Call Differs
BMO notes they are one of only two positive ratings on the stock. Firm believes their estimates are the most detailed, as we model the company at a carrier level, looking at both units and ASP. The stock has been out of favor for a while. The last major technology upgrade cycle began eight years ago, MiFi didn’t live up to the initial hype, Asian competitors took share worldwide, and Qualcomm had taken 95% of the embedded laptop business. They think that the Mobile Broadband business, while it tends to be a bit choppier than M2M, has much better leverage and better economies of scale to create value for companies that do it well.

BMO believes the Street is modeling one quarter of strength from LTE. They, however, think there will be several strong quarters. As a result, their September revenue estimate of $142 million is well above consensus of $119 million. They are also way above for 2012 revenues and earnings.

Valuation
The P/E ratio of NVTL has varied considerably owing to the inherent leverage in the model, with P/Es in excess of 70x prior to the launch of EVDO rev A. Therefore, BMO believes EV/sales is a better comparison when looking at historic valuation. BMO's $12 price target for NVTL implies a P/E of 12x their 2012 pro forma EPS estimate and an EV/Sales of about 0.5, below the 2007 ratio of 1.2.

Notablecalls: Well guys, this is potentially a game-changing call from BMO. NVTL has been left for dead as the M2M hype didn't materialize fast enough. Remember NVTL & SWIR were all the rage back in 2007.

Now 4 yrs later Verizon the nations largest wireless operator is starting to push Novatel's Mifi in a major way. It looks like only BMO has picked this up so far, offering investors a potentially huge risk/reward situation.

Even if BMO's half-right, this thing is likely 2x undervalued.

From trading perspective I've witnessed 10-20% intraday moves in NVTL in reaction to positive news. I think we may have similar potential here in the n-t.

I'm fairly sure it can do $5.50 today but I'm certainly hoping for more.

Actionable Call Alert!

PS: I'm intentionally posting this after market open (9:30 ET AM) after watching so many of the small-cap names being bid up to unhealthy levels in the pre-market.

MGM Resorts (NYSE:MGM): Upgrading to Outperform - Macau Makes All the Difference - Bernstein

2011-06-13T09:09:00.001-04:00

MGM Resorts (NYSE:MGM) is getting upgraded to Outperform from Mkt Perform at Bernstein this morning. The analyst, Janet Brashear is slapping a $17 price target on the name (prev. $15), representing 35% upside.

Here are some of the details:

MGM is becoming a serious player in Macau. For the past two quarters, MGM has had a 10-11% share of the gross gaming revenue (GGR) in Macau versus a prior share of 7-8%. With six months at this level, we are using this market share as the basis for future projections. While share will come down somewhat as Galaxy and LVS open new properties, we assume it is off this new, higher base.

Macau makes all the difference. MGM's Achilles heel strategically has always been its lack of market diversification with Las Vegas accounting for 80% of EBITDA. The recent IPO of MGM China Holdings was an important inflection point. MGM's share of this venture increased 1% to 51%, which has more value from a control standpoint than an earnings standpoint. But, there has been a big change in earnings as well based on MGM improving its market share by about 300 bps and the upward revisions in market growth estimates to around 35% y/y. Macau is growing from an inconsequential share of overall growth to a significant component of earnings. This growing component of earnings deserves a higher multiple as well. MGM China Holdings first began trading at around 13x EV/EBITDA based on market estimates, an attractive premium to the ~10x rating MGM gets in the U.S.

It is time to take MGM seriously in Macau. Projecting off the past performance of MGM Macau can lead to an underestimation of this casino's future potential. The casino is roughly the size of its neighbor on the peninsula, Wynn Macau, but it has never produced Wynn-style results. In 2008, MGM produced onefourth the EBITDA of Wynn. In 2009, that grew to 30%. In 2010, it grew again to 40%. This year we project MGM EBITDA will be 53% of our Wynn projection. The point is not that MGM can or will surpass Wynn—just that it has finally improved to the point of being a very viable competitor with substantially enhanced bottom-line prospects.

The Macau market is STILL growing. We have increased our market projections in Macau to 35% for this year and 17-19% in subsequent years. This growth rate compares favorably to Las Vegas and, along with the incremental market share, raises MGM Macau's contribution to over 20% of total EBITDA in 2014, from only 2% in 2008.

Las Vegas is no longer the only lynchpin. We believe many investors are waiting for signs of a Las Vegas recovery to reassess MGM's stock. Our model assumes some improvement in Las Vegas but is well shy of a full recovery, even in 2014. The Macau portion of the model, given the seismic improvements, is a bigger driver for MGM right now.

Valuation is very attractive at current levels, even considering the risk profile. MGM is a risky stock with a net debt-to-EBITDA ratio approaching 11x. While much of this debt is long-dated, averting some near-term risks, the company is very sensitive to economic changes (here or in China) and may be prone to equity dilution. That being said, the stock is currently trading at 11x 2012 EV/EBITDA which seems cheap relative to its future prospects which encompass the new importance of Macau.

Notablecalls: I think MGM is worth keeping on the radar today for couple of reasons:

- First, it's a bounce play after the $3/share haircut in the past 2 weeks.

- Second, as Bernstein highlights MGM has been gaining market share in Macau. That's a good thing. The stock has tended to move up in times it has gained mkt share in Macau, so today there seems to be a bit of a disconnect there.

But mainly, it's a bounce play for today. I'm guessing $13+. Avoid overpaying early on and wait for a possible pull-back at open.

Chelsea Therapeutics (NASDAQ:CHTP): An Orphan Likely To Be Adopted Soon; $18 target - Roth

2011-06-10T08:54:00.005-04:00

Roth Capital's David Moskowitz, RPh. is making an interesting call on Chelsea Therapeutics (NASDAQ:CHTP) raising his target on the small-cap biotech to $18 (up from $6).

- It looks like CHTP has significant catalysts ahead.

Here are some excerpts from the call (15pg):

* Strong Buzz On Northera At the Movement Disorder Society (MDS) Conference. On Wednesday and Thursday this week, the company featured several data presentations at the MDS conference in Toronto, Canada, including posters on additional data from Northera’s 306A study, and a subset analysis of multiple systems atrophy (MSA) patients from the drug’s pivotal 301 and 302 trials. Additionally, three presentations as part of the company’s symposium on the “Treatment of NOH in Primary Autonomic Failure with Droxidopa” featured Northera and key data from the 301 and 306A studies solidifying the drug’s broad based efficacy across multiple endpoints in NOH patients, as well as its very favorable safety and tolerability profiles. Importantly, key opinion leaders in the U.S. are awaiting access to the first drug to demonstrate clinical benefits in treating patients with neurogenic orthostatic hypotension (NOH), a major issue in patients with Parkinson’s disease. In fact, Japanese physicians that already have access to the product (marketed by Dainippon Sumitomo in Japan since 1989) expressed significant interest in the new data on the drug presented by Chelsea at the conference. Despite the Northera symposium occurring on the last day of the MDS conference, the presentation room was full, and notably, there was significant activity at the company’s poster sessions the day prior. Many physicians indicated that the striking reduction in falls in Northera-treated patients is a key benefit of the drug candidate. With an estimated 1 million PD patients in the U.S. alone, and up to one-third having symptomatic NOH, we believe Northera has the ability to be a sizable product, despite the intent on initially commercializing the product in an Orphan Drug population (NOH associated with PD).

* We believe Northera’s regulatory package is compelling and supports approval in the neurogenic orthostatic hypotension (NOH) indication. CHTP is in position to gain approval as early as 1Q'12. We raise our PT on CHTP, on increased confidence in the drug’s potential for approval and market opportunity. Data from the recent MDS meeting add support to our investment conclusion.

Summary & Investment Thesis

CHTP’s lead product candidate, Northera (droxidopa), is being readied for a 3Q 2011 submission to the FDA for review, and we believe this drug offers an important benefit to patients with neurogenic orthostatic hypotension (NOH) associated with Parkinson’s Disease (PD). NOH is a disorder caused by a deficient release of norepinephrine, which leads to decreased blood pressure upon standing, lightheadedness, dizziness, blurred vision, and syncope (fainting). In many cases, patients that have NOH can fall and worsen their health status, and in some patients, the disease itself is so debilitating that those patients remain bedridden. As a result, the FDA deems NOH an unmet medical need, and has also granted the company Orphan Drug designation for Northera. As a result, the likelihood of a Priority Review by U.S. regulators could result in a potential FDA approval of the drug in 1Q 2012. We believe the company’s clinical data package for Northera is very strong, given one highly statistically significant Phase III trial (conducted under an SPA), and another Phase III trial that provides highly consistent support to results from the larger study. Because the second study did not achieve statistical significance on the primary endpoint, many investors have exited the shares since the early part of this year, creating an opportunity, in our view. After analyzing the trial data, we believe the second study demonstrates strong efficacy of the drug, given the statistically significant result on the same endpoint as in the first trial (although not prospectively designed as the primary endpoint). Importantly, when pooling the two Phase III trials together (which we believe the FDA will do), the statistical power increases dramatically, and causes the full data set to become highly statistically significant. The compelling Phase III data, the vast efficacy and safety database generated on Northera (the drug has been on the market in Japan since 1989), as well as the high need for the drug in PD patients, boost our confidence that FDA will approve the drug next year, and that sales could peak at over $400 million in the U.S. alone. Given this potentially large opportunity, and that the company has the ability to market the drug with its own small sales force, we believe the financial leverage to the company could be impressive if Northera is approved. As a result, we believe the risk reward on shares of CHTP is compelling and we recommend that event-drive investors with a high-risk tolerance buy the stock.

Notablecalls: While I'm not familiar with CHTP story, I do like what I see so far:

- As per Roth, Docs seem to be really excited about Northera's promise. This has proven to be a significant tell in past cases.

- The company seems to be REALLY close to commercial success as approval is expected some time in 2012. They have orphan status, fast-track & a SPA. Pretty much means they will get priority review.

- Northera has been marketed in Japan since 1989, which means there's a safety database generated over 20 yrs. That resonates well with the FDA.

- There is currently only one alternative treatment on the market (and it could be pulled, according to Roth).

I'm sure there's a catch there somewhere. After all, this is a $250 million biotech. But considering Roth's target is by way the new Street high target for the name and the fact it has produced 25-50% intraday moves in the past, its worth keeping on the radar.

This one could easily trade to $5+ today.

PS: Amazingly, Roth was not involved in CHTP's last equity offering. Deutsche Bank handled the deal in Feb.

ARM Holdings (NASDAQ:ARMH) - Did it work?

2011-06-07T12:01:00.004-04:00

The ARM Holdings (NASDAQ:ARMH) call begs the question - Did it work?

Well, sort of. If you look at the squeeze that happened after 9:30 AM ET it clearly didn't. Most likely one would have taken a $0.50 loss on the position.

Yet, if you look at what happened in the pre-market, depending on one's entry/exit a $0.50- 0.80 profit was to be had.

I think what one has to consider is that ARMH is an ADR (American Depository Share), which means it trades primarily elsewhere. ADR's tend to make their moves in the pre-market. There are exceptions of course, one being Nokia (NYSE:NOK). NOK tends to extend its pre-market moves in regular hours.

Just wanted to get this off my chest.

PS: Sorry for the lack of posts lately. I don't want to post stuff for the sake of posting. Posts generate traffic but as many of you know, I don't ride that way. No popularity contests here.

ARM Holdings (NASDAQ:ARMH): Intel plotting a coup at Apple? - Citi

2011-06-07T06:30:00.002-04:00

Citigroup Semiconductor team is out with some fairly interesting comments on Apple (NASDAQ:AAPL) & Intel (NASDAQ:INTC) saying a foundry relationship may be forming between the two companies.

Firm's discussions with the hardware supply chain tend to support this belief. Intel has previously acknowledged they would be amenable to such a relationship, under the right conditions. Citi notes they suspect one such condition includes the potential for Apple to eventually convert from an ARM-based core for handsets and tablets to x86. Given the growth opportunity this opens for x86 processors, they would view such a foundry relationship, were it to happen, positively.

Potential to Migrate Apple to x86 — Intel’s revolutionary 22nm multi-gate manufacturing process is likely the main attraction for Apple. While they do expect TSMC to garner a portion of Apple’s foundry business, Intel’s substantial manufacturing lead with such a critical technology makes them a logical candidate. This is especially so given design difficulties Apple may encounter when migrating the Ax processor to 28nm and below. Citi suspects Intel’s late migration of Atom to 22nm could be in relationship to a potential foundry partnership with Apple (much like Samsung’s delay of their Hummingbird solution).

14nm the Trigger Point — Should such a deal materialize, Citi expects Intel will initially produce ARM-based solutions for Apple at 22nm. With an ARM-architect license, they see no hurdles to this. But as Intel readies 14nm (2013), potential for a shift to x86 exists. At that stage, Intel would have appropriately moved along the SOC learning curve. We believe Intel’s recent cap-ex increase, geared predominantly for 14nm, may have been inspired by the potential for an Apple relationship. Recall Intel is building a new fab in Arizona (Fab 42), geared specifically for 14nm.

- ... the note goes on discussing GM impact and current trends. Yada-yada.

Notablecalls: Nothing new about the AAPL/INTC foundy talk. This has been around for a while now. What's significant are the comments regarding AAPL converting their ARM-based core for handsets and tablets to x86.

That would present a major blow for ARM Holdings (NASDAQ:AMRH). The stock is trading up in the pre market (trades primarly in London) but as the Citi comments start circulating, I suspect we will see some selling pressure in the name today.

Chipotle Mexican Grill (NYSE:CMG): A $1,000+ Stock? - Janney

2011-06-02T08:34:00.002-04:00

Janney is making Glory Hound call on Chipotle Mexican Grill (NYSE:CMG) calling it a $1,000+ stock in the long-run.

(Got your attention, didn't I?)

Well, their actual 12-month target is a mere Street high of $375 (prev. $330) as their estimates for 2011/12 move above consensus.

The details:

Based on favorable feedback from multiple industry sources, we raise our 2011 and 2012 EPS estimates for Chipotle Mexican Grill (CMG $289.54; Buy) by nine cents and 35 cents, respectively, to $6.85 and $8.45. Each of these figures lies four cents above First Call consensus.

Looking specifically at Q2 2011, we take up our same-store sales forecast to 8.5% from 6.5%, above the Consensus Metrix figure of 7.8%. This drives our Q2 EPS estimate upwards by two cents, to $1.72 (four cents above First Call consensus).

Over time, we view the long-term potential of the Chipotle concept as 3,000-4,000 in the U.S., at least 2,400 in Europe, and at least several hundred in the Asia/Pacific region. This is at least 6,000 worldwide outlets for the Chipotle concept. But we do not believe Chipotle views itself as “just” a burrito company. Indeed, the first of the company’s ShopHouse Southeast Asian Kitchen restaurants is scheduled to open this summer in Washington D.C. Over the long run, it’s entirely possible that the company could host 3-5 concepts under its belt -- each focused on high-quality ingredients, fine-dining cooking techniques, and speedy customer service (albeit through different cuisines).

If -- if -- Chipotle can reasonably keep up its unit growth rate by decade’s end, then the range of P/E multiples we apply to the 2020E EPS range of possibilities (from $30.00 to $45.00) is from 20x to 30x. This sensitivity analysis suggests a year-end 2020 stock price of $600 to $1,350, with the middle portion of our assumptions getting us to a year-end 2020 stock price of $788 to $1,100. Discounting the possible year-end 2020 stock price back to today at a 10.0% discount rate generates a fair value estimate today ranging from $254 to $573. This middle portion of our assumptions, discounted back at a 10.0% rate, provides us with a possible fair value estimate between $334 to $467. With this note, we officially update our fair value estimate to $375 from $330, which is in the lower half of this middle portion of our sensitivity analysis.

Fantasizing about a best-case “what if?” scenario, the table above also includes a (very) long-term unit count potential of 10,000 restaurants, generating an average $2.7 million in annual sales, and a company-level operating margin of 20.0%. This suggests a (very) long-term EPS of over $111.

Dare to dream!

Chipotle Mexican Grill remains our top restaurant-stock pick for 2011, and we reiterate our Buy rating on it.

Notablecalls: It's not every day you see such targets (even the l-t kind) coming from from a sell side shop.

Janney has played their hand in CMG pretty well, keeping their cool while others have downgraded the name due to high valuation and whatnot.

I suspect the $1,000+ target will create some excitement among investors and traders in the n-t.

VirnetX Holding Corp (NYSE:VHC): Initiating with Outperform; See significant Upside - Cowen

2011-05-27T08:41:00.006-04:00

Cowen is initiating VirnetX Holding Corp (NYSE:VHC) with Outperform rating >40% upside target this morning calling it an unique IP play with ample upside.

Real-time peer-to-peer communication, including video chat, should be among the compelling applications end-users adopt as all-IP 4G LTE wireless networks and two-camera smartphones proliferate. Cowen believes VHC’s intellectual property sits at the heart of that market opportunity, making connections between end-users on tomorrow’s 4G networks as convenient and secure as those found on today’s voice networks. Over the next 1-5 years, the firm expects most major device OEMs to license, or otherwise be made aware of, patents VirnetX has uniquely declared as essential to the 3GPP’s LTE Series 33 specification. They expect VHC to appreciate > 40% relative to the market over the next year as its model tracks toward our $185MM C14 revenue forecast.

VirnetX is basically pre-revenue today; its (almost) only source of income the last twelve months was a $200MM settlement from Microsoft in 2Q10 that allowed MSFT limited use of the company's IPR. Looking forward, strong growth in VirnetX's core market (and increased licensee count) should drive EPS from ($0.32) in C11 to $1.25/est. diluted share in C14.

VirnetX Declares Its IPR Essential to LTE Standard. VirnetX has declared its IP "essential" to the 3GPP standards body which governs the LTE technology specification. That declaration makes OEMs of LTE equipment aware VHC believes its technology must be licensed to avoid infringing its patents (IPR). VirnetX’s key IPR automates the setup (lookup) of VPN connections between trusted peers, as called for in the Series 33 specification. We do not believe the 3GPP will (can) find a workaround for VirnetX’s patents, especially now that VHC has agreed to FRAND licensing.

Royalty Revenue From Massive 4G Market Likely. Cowen sizes the LTE market at $38B in 2014, growing at a ~34% 10-year CAGR through 2021. VHC should see $175MM of licensing revenue from that C14 TAM; they expect its LTE equipment royalties will increase sharply beyond C14 as its licensee count grows. VHC’s SDNI initiative, which automatically performs the lookup and key exchange (registry) services needed to connect trusted peers across networks, should see modest revenue near-term. SDNI has potential to become a highly valuable asset 4G operators utilize to deploy Skype-like (sold to MSFT for ~$8.5B) services, only using industry standard VPN.

- Strategic LTE Position Makes VirnetX an Acquisition Target

Cowen's Take: they believe VirnetX'ss core patents would be highly useful to a company with a weak relative position in the 4G LTE standard's patent stack (or no position whatsoever). They believe companies in this group that want to manufacture 4G LTE devices and/or equipment - including Apple, Cisco, and others - will recognize their margins will be inferior to what could be achieved if they did not have to pay for the use of competitor IPR. Patent stacking means that an OEM who has no/limited patents could face as high as a 12-15% total payment to 4G LTE IPR holders without patents to cross-license. 3G patents are likely somewhat lower today (in the 12% range) because Qualcomm has struck deals to pass through others patents for the 5%+ it charges (minus cross-licenses, its rate nets closer to 4%). To be competitive in the emerging tablet or converged 4G device market, many tech sector giants are likely to be looking for key 4G LTE IPR and they believe VHC fits the bill.

Cowen versus Consensus
Sell-side coverage of VHC is currently very limited. Thomson First Call shows the last set of estimates for VHC were provided in early April (i.e., before the company's 4/27/11 1Q11 March quarterly results report and conference call), and consisted of only a FY11 top and bottom line estimate. Therefore, Cowen assumes there is no standing consensus for VHC. They note the company does not provide full financial guidance.

Notablecalls: VHC is an animal of a stock. It's up 10-fold over the past 18 months, seemingly without any real analyst coverage. Cowen is the first Wall Street firm to officially pick up coverage and they sure are positive on the name.

What Cowen is essentially saying is that all the tech heavyweights (AAPL, CSCO, MSFT etc) need VHC's LTE 4G IP. That means not only revenues but makes the company a takeover candidate.

I also suspect Cowen's initiation serves as a prelude for a flurry of other firms picking up coverage.

Note there's about 20% short interest in the name.

All in all, I think VHC is likely to trade up in the n-t. It's a big mover, so worth keeping on radar. I would not be surprised to see a 7-10% move.

AK Steel (NYSE:AKS): Upgrade to Overweight with $24 PT - Morgan Stanley

2011-05-23T08:35:00.005-04:00

Morgan Stanley's Metals & Mining team is out with positive Sector call noting that last week's slew of positive copper data points and outperformance in bellwether stock, FCX, could be harbingers of a shift in sentiment for the space.

They believe the recent ~15% correction provides more favorable risk-reward in steel (top picks AKS, X) and metals (FCX), in particular. Inflation and global growth remain key concerns among investors. Firm's Chinese Economics team expects China CPI to peak in June, which could lead to improved sentiment on growth towards the end of summer.

In particular, they are upgrading AK Steel (NYSE:AKS) to Overweight from Equal-Weight with a $24 price target (prev. NA) saying their Bull Case scenario points to $46 fair value (+266%).

The details:

Upgrading to Overweight: AK Steel is turning the corner, and earnings power is not priced in: While shares across the steel space have become cheap as a result of the recent correction, we see significant value upside in AKS shares, in particular (70% to our PT of $24). Our mid-cycle EBITDA estimate is 30% higher than what is discounted in the shares on our view that benefits from sustainable cost cuts, a lesser impact from iron ore costs, and improving margins in the company’s key electrical steel business have gone unnoticed.

Raising our valuation and estimates: We are raising our estimates by 30% in 2011 and 20-40% in 2012-13; we are now 15-40% above consensus in 2011-12 and 75% above in 2013. Our $24 price target is based on 10x 2012e EPS, and 5.0x our mid-cycle EBITDA estimate of $131/t.

Our higher estimates are a result of three factors: 1. Deep dive on mid-cycle earnings power: In the years leading into the downturn, AK Steel made significant sustainable cost cuts and operational improvements. We scrutinized the business and determined the company has improved sustainable EBITDA by $84/t since 2003.

2. New iron ore strategy: An iron ore margin squeeze was a major headwind for AKS shares in 2010, and investors remain concerned. We think the company’s tighter product markets enables it to pass iron ore costs through, and new contracts structures will make this automatic for 70% of sales.

3. Electrical steel market bottoming: Electrical steel appears to be recovering as ABB and Siemens reported strong growth in 1Q new orders, a good leading indicator of electrical steel volumes and pricing. This high margin business could improve EPS by $0.35 in 2012.

We see two catalysts in July: First, we expect steel prices to bottom around July; falling prices are currently an overhang. Second, we think 3Q guidance will surprise to the upside, which the company will release in late July.

Notablecalls: I think AKS has a fair chance of working on this call. Consider this:

- It's Morgan Stanley making the call. One of the largest Sell side crews out there. It's a sector call which adds some weight.

- The call makes sense, especially the part about iron ore cost pass-throughs (which I suspect was unknown to many). The electrical steel order trends at Siemens & ABB look interesting.

- It's very difficult to resist the Bull case +266% price target.

- There's a few catalysts out there. Always a plus. Morgan Stanley's estimates are now way above consensus and they are calling for an upside surprise in July.

The market this morning looks awful but this may actually be a good thing as it enables you to get OK fills.

It's one of those calls where you can expect a positive bias vs. the tape.

Mosaic (NYSE:MOS): Upgraded to Positive from Neutral at Susquehanna

2011-05-20T08:43:00.002-04:00

Susqueanna Agriculture analyst Don Carson is upgrading Mosaic (NYSE:MOS) to Positive from Neutral with a $87 price target (prev. unch).

Susquehanna expects that the removal of most of the uncertainty surrounding the Cargill overhang will shift investor focus back to Mosaic's strong fundamental outlook for FY11/FY12. With the $65 per share secondary pricing reflecting an EV/EBITDA multiple of 6.6x their CY11 estimates, a significant discount to the 9.5x multiple at which peer POT trades, they believe MOS shares offer investors compelling upside from current levels.

Compelling risk/reward. The $65 per share pricing of the secondary offering represents a 24% discount to the $85 price at which MOS shares traded when the Cargill divestiture was originally announced on January 18 versus a 14.7% decline for the group over the same time-frame. Mosaic's under-performance, in Susquehanna's view, was primarily due to the sizable Cargill overhang. With 64-73% of the 157 mln shares that are eligible for distribution in the first 15 months post the deal closing now placed, they expect investor focus will shift back to the strong grain and potash outlook, and the compelling value that MOS shares offer at current levels.

Even at lower phosphate multiples. On January 20, following the initial announcement of the Cargill divestiture, the firm lowered their rating to Neutral and their phosphate segment multiple to 7.0x their CY11 EBITDA estimate from 8.0x. At the time, the firm cited the sizable new capacity slated to come online in 2011-2015 in Saudi Arabia and Morocco, and their view that while they did not expect a major decline in DAP prices until 2013, that they expected a compression in MOS's multiple, particularly given that the earnings decline that they expected
would result from the new capacity coinciding with significant new MOS share issuance. At the current share price, the firm believes these risks are fully reflected in the stock. Considerable upside exists in MOS shares, even at lower phosphate multiples – Susquehanna notes that a further 2 point multiple reduction from 7.0x to 5.0x CY11 EBITDA still results in an $80 price target, or 23% upside.

Notablecalls: This looks like a solid call that should push MOS higher in the n-t.

For further comments, see below.

Mosaic (NYSE:MOS): Don Carson from Susquehanna - BUY

2011-05-20T08:07:00.002-04:00

Susquehanna's Don Carson, the Axe in Mosaic (NYSE:MOS) is upgrading his rating to Positive from Neutral this morning with a $87 price tag (prev. unch).

The 100 million share offering was priced @ $65 & I suspect the thing was a consensus short ahead of it.

The buyers here aren't flippers.

Carson's the Axe in the name, I'm told.

Probably means the stock is a buy here.

(I will update on details as soon as I get them).

Research in Motion (NASDAQ:RIMM): Cover Your Shorts Today - Bernstein

2011-05-18T08:33:00.006-04:00

Bernstein's Pierre Ferragu, the Axe in Research in Motion (NASDAQ:RIMM) is backing off from his uber bearish thesis this morning.

- Ferragu is upgrading RIMM to Market Perform from Underperform (tgt unch. $40) telling his clients to cover their shorts today.

RIM's stock has lost 39% since its high of February and is now clearly implying a medium term evolution of the company far worse than management guidance or even sell-side consensus implies. With EPS 10% below consensus for this year and 21% for next year, they believe they currently model the bleakest possible outlook for the company and show in this piece of research that a significantly worse scenario is very unlikely to materialise in the next 2 years. As a consequence, Bernstein recommends covering short positions in RIM today.

They also recognise the stock is particularly cheap on any metric, were the company to stabilise its current position and make the right strategic moves to stay in the smartphone race. But they believe management remains in denial of challenges facing the company and therefore do not recommend buying the stock yet, or at least not beyond a short term play on a likely rebound.

They recommend covering short positions in RIM.

RIM's stock has lost 39% since its high of February, while sell-side earnings expectations only marginally adjusted and management maintained full year guidance. The stock is now trading at 4.7x management guidance and 5.5x sell side consensus for FY12 EPS (ex-net cash). In other words, investors give no credit to these numbers.

Even on their numbers, RIM appears cheap on all metrics. The firm forecasts EPS 10% below consensus (22% below guidance) for this year, 21% for next year. On these numbers RIM recently traded at 5.6x 2012 ex-cash Earnings and 0.9x 2012 sales, at the bottom end of the tech universe.

Bernstein believes the scenario they model is already very pessimistic.

They model RIM's user base growing only 32% this year and 17% next year, compared to 46% over the last 12 months, which implies a combination of continued share loss in North America, peak shipments in Europe this quarter and a steep deceleration of growth in other markets.

They expect service revenue per user down 25% in FY13 and FY14 resulting in service revenues falling by 10% in FY13 and 14% in FY 14, and device shipment growing 10% in FY12, 3% in FY13, which implies replacement rates will fall from 79% in the last 12 months to 61% in FY12 and 55% in FY13.

They model ASPs falling 7% this year, 12% in FY2013, which correspond to an ASP of $284 this year and $250 next year.

A scenario still justifying a short position (i.e. driving less than $4 of earnings for this year or next) remain highly unlikely. They do not see EPS falling below $4 per share without a steep collapse in shipment volumes. Such a scenario would reflect a decline of RIM's user base both the US and international markets, which remains very unlikely in the medium term, given the continued traction the brand gets in low ASP segments and outside of the US.

The firm therefore recommends covering short positions on RIM today.

Notablecalls: Ladies and gentlemen, will you give it up for Pierre Ferragu at Bernstein. He has done a great job as the most bearish Street analyst in RIMM.

Rumour has it RBC's former RIMM uber bull Mike Abramsky bursts into tears every time Ferragu is mentioned.

The stock is down 39% since February, pretty much in a straight line.

Today, Ferragu is telling his clients to cover their shorts. I suspect the stock will see n-t bounce that could last for several days and takes the stock toward $46-47 level.

I've been looking for a reason to buy RIMM for quite a while now (and have the tire marks on my back to prove I have tried). Today we got good one.

Oh and give kudos where it's due. I do!

Apple (NASDAQ:AAPL): Apple cutting 2Q11 iPhone production?! - FBR

2011-05-17T08:00:00.002-04:00

FBR Capital Markets is out with some fairly cautious comments on Apple (NASDAQ:AAPL) saying that in short, their contacts now say 2Q11 iPhone production estimates were revised downward for 2Q11.

2Q iPhone build estimates revised downward on weak CDMA sell through. For the iPhone, FBR's contacts suggest calendar 2Q11 iPhone production has been revised downward since their last checks by 16% to 20.1M units. The majority of this negative revision was due to lower CDMAbased iPhone production, which was reduced from 5.0M builds to 2.1M builds. This negative -58% revision was on the back of lower than expected CDMA sell through at Verizon where they hear Apple faces steep competition in the CDMA-based smartphone market from Samsung and HTC -- both firms that address many price points from smart-feature phones to smartphones. Net, they now see 43M iPhones built in 1H11, suggesting Apple will build closer to 90M iPhones this year, down from their previous estimate of 100M-105M iPhones in 2011. Given the channel build and production estimates for 2Q, they estimate Apple could sell as many as 21M iPhones in the second quarter (below FBR's previous maximum of 25M units) before inventory levels reach hand to mouth.

Importantly for the iPhone 5 (codenamed N94), FBR's contacts have confirmed that Qualcomm is replacing Intel as the baseband supplier, selling an integrated CDMA/WCDMA baseband that allows Apple to streamline production. The iPhone 5 will also use an 8MP camera with OmniVision’s CMOS sensors, with Sony possibly being a backup image sensor supplier in 2012.

For the iPad, devicebuilds remain constrained as Japanese earthquake related supply chain shortages and manufacturing bottlenecks hamper production. iPad2 builds in 2Q are unrevised at 6.2M units, but early 3Q estimates reflect a sequential drop of 1M builds to 5.2M builds due to the aforementioned factors (though these could still get resolved and iPad production could get ratcheted up). Unless something were to change dramatically, Apple's internal iPad production goal of 40M-45M units for 2011 now seems out of reach.

3Q iPhone build estimates now flat sequentially, somewhat lower than expected. FBR's first look at 3Q11 iPhone production shows total iPhone production remaining roughly flat sequentially at 20M units, with 8M of these units being the long awaited iPhone 5, 1.8M units being CDMA-based iPhone 4, and 10.3M units being traditional iPhone 4 devices. They note that sequentially flat production is slightly worse than expected, and suggests Apple could sell as many as 22M iPhones in 3Q11 if it were to draw inventories down to hand-to-mouth levels.

Notablecalls: It is possible that the Android based phones are starting to take market share from Apple's iPhone? The answer is yes, according to FBR.

There has been so much hype & hope tied to the Verizon oppty that I can't believe the stock would go unpunished following FBR comments.

And the iPad scare, back again?

Not good. Not in this tape.

Airlines: Don't Wait, Just Buy - J.P. Morgan

2011-05-16T08:47:00.003-04:00

J.P. Morgan's legendary Airline analyst Jamie Baker is out with very positive comments on several names. He is upgrading:

- AMR Corp (NYSE:AMR) to Overweight from Neutral with a $9.50 price target (prev. $8.50)

- JetBlue (NASDAQ:JBLU) to Overweight from Neutral with a $8.00 price target (prev. $7.00)

- US Airways Group (NYSE:LCC) price target moves to $18.00 from $13.50. The name remains OW rated.

According to JPM Jet fuel prices have declined $0.30 per gallon since April 29, representing a potential annualized industry benefit approaching $3.5 billion. And yet not a single estimate has been revised during this time. They’re not entirely sure why (they have some ideas), and would therefore suggest investors increase their exposure ahead of an expected upward surge in consensus estimates in coming weeks. For the second time in as many weeks, they are raising their estimates and target prices, with AMR and JBLU targets rising by an amount sufficient to warrant upgrades from Neutral to Overweight

The details:

Fuel prices have fallen—Jet fuel prices have declined $0.30/gallon from April 29, representing a potential annualized industry benefit approaching $3.5 billion (net of slightly softer revenue). Relative to our expectations, which were last recalibrated on April 27, this represents ~20% upside potential to earlier 2011 operating profit estimates, and ~30% in 2012.

Consensus remains grounded—In response to lower fuel costs, consensus airline estimates have . . . not budged. We’re not entirely sure why. Perhaps it’s merely earnings fatigue. Perhaps, after broadly reducing expectations into the Q1 earnings season, the sellside is recalcitrant to acknowledge it cut too deeply. Or perhaps, others are choosing to wait until the early-June release of May operating data. And hey, we understand that fuel volatility can easily leave one feeling whipsawed.

We see no reason to wait, and we suggest investors position themselves accordingly—We are broadly raising estimates and targets along with two ratings changes, and we suggest investors increase their exposure to airline equities ahead of an expected upward surge in consensus estimates. This week's airline investor conference coupled with the release of May operating data shortly thereafter is expected to awaken a stubborn consensus.

Our estimates are moving up—Our industry operating profit estimates rise by ~20% in 2011 and ~30% in 2012, resulting in estimates (with the exception of Alaska) that exceed consensus in every case, sometimes by as much as a factor of two.

Notablecalls: Mr. Baker = God. At least when it comes to Airline stocks. People buy his calls with eyes closed.

Baker turned slightly positive on the space on April 29 raising his estimates for the first time since last spring.

His main message was:

Same fuel, different industry—Here’s the sound bite: 2008 and 2011 fuel at midyear look about the same. In 2008 we expected a ~$7 billion operating loss, for 2011 we expect a ~$7 billion profit. Fundamentals tell a strong story, equities a weak one, and we think the latter is mistaken.

I would not be surprised to see 7-10% moves in the upgraded names over the next week or so. Several other names like LCC and UAL should perform as well. Barring a huge spike in oil, obviously.

What I really love about Mr. Baker's call is that you can go long after the open and just hold the names and watch them go up for days.

Sandisk (NASDAQ:SNDK): $100 Bull Case on +$7 EPS in 2012; BUY - Morgan Stanley

2011-05-16T08:00:00.003-04:00

Morgan Stanley Semiconductors team is out very positive on Sandisk (NASDAQ:SNDK) raising their EPS #'s way above consensus while reiterating their $100 Bull Case target for 2012.

According to the firm, investors are missing the longer-term growth story:

SNDK is trading at 9x/6x Morgan Stanley's revised CY11/12 estimates respectively, suggesting investors underestimate the revenue and EPS upside potential from three catalysts: 1) NAND is becoming a non-commodity for OEM devices like smartphones as reflected by a 32% delta between spot and contract pricing; 2) client SSD adoption is poised to accelerate in 2H11 and 2012 as new ultra light notebooks with SSDs/and hybrid-SSD are launched; 3) NAND demand for high speed performance in enterprise storage for cloud computing surges.

Raising Estimates: Morgan Stanley raise their CY11/12 estimates on improving supply-demand fundamentals as reflected by Toshiba’s (#2 NAND maker globally - covered by Kazuo Yoshikawa) recent 20-30% annual ASP decline outlook versus MSe 32%. Their revised CY11/12 estimates are 24%/60% above consensus. Firm models full year gross margins at 46% versus 41-44% guide and ~300bps expansion next year.

What's Changed:
Price Target $65.00 to $70.00
CY11 Earnings From $4.97 to $5.46
CY12 Earnings From $6.28 to $7.31
CY13 Earnings Initiate at $9.90

Notablecalls: OK, this is a new one - NAND is now a non-commodity play as per Morgan Stanley. You hang around long enough in this business, you hear it all.

OK, Morgan Stanley's thesis seems to be that NAND will be non-commodity for the next 12-18 months as there is a lot of demand and they have the best quality product & manufacturing know-how. People are waking up to the fact NAND is quite difficult to manufacture. So that makes the call somewhat more understandable.

They are also playing the SSD card saying there will be lots of demand in 2012. That's what STEC CEO kept saying on their earnings conference call last week. STEC is building manufacturing capacity to meet an explosion of demand starting 2012. (Btw, STEC is getting upgraded by Benchmark this morning)

It also appears that the iPad scare is over. It pretty much ended the day JMP cut their rating on SNDK.

Morgan Stanley's estimates go WAY above consensus which will grab people's attention.

The SNDK call has a fair chance of working in the n-t.

Dead Foods Company (NYSE:DF): Upgraded to Buy at Goldman Sachs

2011-05-15T14:01:00.004-04:00

Goldman Sachs is upgrading Dead Foods Company (NYSE:DF) to Buy from Neutral with a $19 price target representing 55% upside.

- They see the stock a potential double in 2-years, with $25 SOTP value.

The crux of Goldman's call is that DF’s margins have troughed at 3%-4% EBIT margin and they now have increased confidence that margins could recover towards a 5%-6% level over the next few years. Retailer pricing pressure on private label milk is in firm's view abating – leading to improved margin over milk costs – and cost savings could total more $1 per share of earnings over the next few years. Goldman is raising 2012/2013 estimates to $1.20/$1.50 from $0.78/$0.91.

DF’s margins are nearly 300 bp lower versus historical averages – DF’s EBIT margins have declined to 3.5% from its historical average margin of 6.5% and well off its peak margin of 7.7%. The primary driver of margin decline has been the pricing pressure from retailers on private label milk, which led to lower margin on DF’s private label milk and a wider price gap between branded and private label milk that resulted in consumer downtrading to private label milk.

Two quarters of improved pricing in private label milk – Goldman says they have begun to see signs of a more stable pricing environment as retailers are no longer pressuring private label milk pricing and promotional activity is down from the 2010 level. This is a positive for DF not only as margin over milk costs is improving but the branded milk performance is also improving, helping DF’s mix.

DF expects another $300 mm-plus in cost saves over the next three years – DF’s cost saving opportunity is sizable, with $100mm-plus targeted in each of the next three years. Firm's channel checks suggest DF’s cost savings opportunity is indeed large as the company improves supply chain, procurement, eliminates headcount, and integrates IT.

Stable pricing plus cost savings should drive margin recovery towards 5%- 6% level over the next few years – Given the improved pricing environment, they now have more confidence that DF should see some portion of its cost savings flow to the bottom line. Goldman is assuming about ½ of the $100 mm cost savings accrues to the bottom line, which should be enough to drive nearly 32% growth in EBIT in 2012 and 10-11% growth in 2013-2014. Their model forecasts 5.5% EBIT margin by 2014.

DF is also a deleveraging story – DF’s balance sheet remains highly levered at north of 5x, though recent asset sales have improved the leverage profile a bit. As their model forecasts sizable EBITDA growth over the next few years, DF should be in position to de-lever its balance sheet more quickly than consensus expects. They see DF’s net debt/EBITDA at 3.2x by the end of 2013. Lower interest expenses should boost EPS significantly, as Goldman estimates EPS growth of 72% in 2012 and 24% in 2013.

Shares could double in the next two years – Goldman's sum-of-the-parts valuation assumes a 7.5x Fresh Dairy EV/EBITDA multiple, 10x on Whitewave-Alpro, and 8x on Corporate. The two-year implied value of their SOTP points to $25 per share or about double the current DF price. Goldman expects DF’s 2011-2013 EPS CAGR to be about 45% vs. the Staples average of around 11% as DF should see sizable profit growth as margins recover and EPS is boosted by deleveraging.

Notablecalls: Dean Foods (DF) has been one of the the most hated names in the Food group. Huge leverage coupled with declining milk prices created a situation that left the stock for dead.

Two quarters of improved milk prices have caused the stock to double as the smart money buyers moved in.

Now Goldman is out with a 'all clear' upgrade, calling for another double. Their estimates & price target are the Street high. The upgrade is somewhat reactionary in nature.

The stock will be up 10%+ today, I suspect.

Hopefully there will be a quick dip in the name after open.

PS: Obviously this post was meant to be posted Friday morning but as Blogger was down, I'm posting it today.

Goldman Sachs (NYSE:GS): Dick says Sell

2011-05-12T12:24:00.000-04:00

Rochdale's Dick Bove downgraded his rating on Goldman Sachs (NYSE:GS) to Sell from Neutral with a $120 price target (prev. $163).

The stock is down 7 pts so the s-t trade here is done. Yet, I think the comments from Bove are worth a read:

Goldman may have become the government's favorite target. This is not good for shareholders.

There have been two events in the past few hours that put Goldman Sachs at greater risk. The first was the decision by the Commodity Futures Trading Commission (CFTC) to request a fraud complaint against Goldman Sachs. The second was the conviction of Raj Rajaratnam on insider trading.

"In its quarterly filing with the Securities and Exchange Commission Tuesday, Goldman said that the agency's staff has orally advised it that it intends to recommend the agency bring "aiding and abetting, civil fraud and supervision-related charges" against Goldman Sachs Execution & Clearing.

The CFTC, the filing said, is basing these charges on allegations Goldman knew, or should have known, that its broker-dealer client's subaccounts at Goldman were accounts belonging to customers of the broker-dealer and not the broker-dealer's own accounts."

The fact that Mr. Rajaratnam was convicted may embolden the CFTC to pursue this case more aggressively and it is possible that a trial will follow. This is the problem with this stock. The company has become a target for any political thrust any agency wishes to pursue. It has no defenders.

The government clearly wants something from Goldman and Goldman is not willing to budge. I have repeatedly indicated that this battle is no good for shareholders and this potential charge is simply more evidence of that fact.

In 1932, Andrew Mellon was believed to be the richest man in the United States and he had just served 12 years as Treasury Secretary, a post he was relieved of by President Hoover.

When President Roosevelt took command he needed to personalize his belief that Republicans and capitalists had caused the Depression and that they needed to be punished. He, therefore, decided to sue Mr. Mellon for tax evasion even though neither the Treasury nor the Justice Departments believed Mr. Mellon had done anything wrong.

The President continued his suit for about six years. By the end of that time Mr. Mellon had died and given the United States the National Gallery of Art. The Supreme Court found in Mr. Mellon's favor but it did not matter. The President had found his foil and had achieved his goal.

It is becoming very clear that Goldman Sachs is the government's foil for the causation of the financial crisis. In my view the company has done nothing to remove itself from this position. Until it does so or until the government exacts its penalties, this stock is a bad purchase. It does not really matter who is right. What matters is getting this issue behind the company.

Notablecalls: According to Bove the pressure on the Justice Department to bring a criminal lawsuit against Goldman is building to a high pitch.

Talking to some L-T holders of the stock, the view seems to be that Goldman is becoming a disappointment as the otherwise one-off issues keep surfacing again and again.

Aixtron (NASDAQ:AIXG): Downgrade to Sell; PT to $25

2011-05-11T07:31:00.003-04:00

Canaccord Genuity is downgrading MOCVD leader Aixtron (NASDAQ:AIXG) to Sell from Hold with a $25 price target (prev. 37.50) given an increased risk profile based on changing customer patterns, a pending cyclical downturn and relatively rich valuation.

The details:

Investment highlights
• As we revisit our Third Cycle assumptions, we conclude that even with significant support from China, the MOCVD market is on the verge of a cyclical downturn and 2010/2011 will represent a historical peak in equipment sales.

• Aixtron has changed its bookings policy, leaving it up to management’s discretion from a conservative criteria, including deposits, documentation and delivery date. While the company believes this is a normal event in a maturing market, we simply note it has increased the risk profile.

• AIXTRON remains the leading MOCVD equipment vendor, but shares are expensive on a relative basis, especially in front of what we expect will be a peaking scenario and cyclical downturn in 2012/13.

- Canaccord's not the only firm out cautious on the name. German based WestLB is also cutting their rating to Neutral from Buy on Aixtron (NASDAQ:AIXG) this morning after April sales figures from the LED producers in Taiwan showed only slow growth, and confirm a pattern that the firm has already seen at Cree and SemiLEDS.

LED sales are being squeezed by price weakness and new competition. Accordingly, they have revised their projections for the sale of machines into both Taiwan and Korea, formerly the main markets for LED production equipment. In view of the large capacity additions in China, they still see a strong level of shipments in 2011 but expect the growth in China to be offset by declines elsewhere.

The details:

April LED growth rate drops to 9%. The LED production and packaging sector in Taiwan led by Epistar and Everlight saw sales growth in April fall from 25% year-on-year in March to 9% in April, according to figures published in the last few days. This is based on our sample of 10 companies and compares with a growth rate of 84% this time last year. It is the lowest growth rate since the credit crunch.

Price declines and low margins. We suspect that the year-on-year decline in prices may well have reached 20%. The underlying business in backlighting units (BLUs) for televisions is still seeing increased penetration, albeit with less units per screen, so we expect underlying volumes to increase by around 40-50%. Smartphone and netbook demand may also be some 20% higher in terms of LED units. However, the weak pricing and the effect on the sector of the weak value of sales is bad for margins. Gross margins were below 20% in Q1. Q1 is seasonally slack but it is all the more disappointing that the April recovery has been so slow.

Samsung also complained about the slow screen market. The world’s largest screen producer saw a 25% sequential decline in flat panel TV sales in Q1, which represented an increase of only 5% in the screen market year on year. This is a slow result for a successful product range with a high share of LED BLUs in it. We suspect that the Korean producers of LEDs for TV backlights have even greater difficulty achieving revenue growth than the Taiwanese. The inclination to add new machines against this industry background must be low. In Taiwan, capacity utilisation is said to be 80% but in Korea we believe it is lower than that.

12% downward revision to MOCVD machine market forecast for 2011. In light of the difficult state of the client industry, we have lowered our forecasts for deliveries by 12% for 2011 and 18% for next year. Within this we still believe that Aixtron will increase its market share. This is because of the catch-up effect, which should derive from the success of G5 models and Crius II.

Notablecalls: To put this in context, please go back and read the April 5 Cree (CREE) downgrade from Morgan Stanley. CREE uses MOCVD reactors from Aixtron. So do many of its competitors.

What has been happening is that LED volumes have been going up but ASP's have been going down. When margins head south, companies will have less incentive to invest in equipment. The equipment side so far has been a duopoly (Veeco & Aixtron) so MOCVD ASP's have been holding up well. It's the volumes that are likely to suffer.

For some reason AIXG has always traded at a way (sometimes 2x) higher valuation than VECO. I suspect that this spread may decrease today.

The $25 PT is the Street low target for AIXG and I suspect will create selling pressure in the name in the n-t. I also suspect most people didn't know about AIXG's revised booking policy.

The stock took almost a 2 pt hit intraday back in Jan when Citigroup initiated it with a Sell & $30 PT, so it's prone to make big moves.

I would not be surprised to see AIXG break $39 level in the very n-t

Sky-mobi (NASDAQ:MOBI): Short squeeze Alert!

2011-05-06T08:11:00.003-04:00

UBS is initiating Sky-mobi (NASDAQ:MOBI) with Buy & $20 target this morning.

UBS thinks the value-added in the handset supply chain has changed from hardware (IC) to software (games or other applications), and thus they are more positive on the long-term outlook for the mobile Internet market than they are for hardware companies. UBS believes the key catalysts for the company’s share price are: 1) the increasing penetration rate of its Maopao platform; 2) improving handset baseband performance, which could better support mobile content functionality; and 3) the rapidly growing mobile Internet market in China. Their price target of US$20.00 is derived from 30x one-year forward PE, and is 44% above the current level.

The share price has fluctuated significantly since the December 2010 IPO: 1) December 2010–January 2011: 37% decline, mainly because of concern on the ‘triple confirmation’ policy; 2) February 2011: the share price rose 51% after the announcement of MOBI’s partnership with Tencent; 3) March-April 2011: 49% rise after MOBI signed an agreement with Sohu; and 4) the past week: the share has declined 33% as some investors sell as the end of the lockup period approaches.

Key catalysts
Increasing bundle rate of Maopao platform MOBI’s Maopao platform has been the dominant middleware in China since 2009. In Q310, the bundle rate increased to 80%+ of China handsets, according to the company. Although the ratio dropped in Q410 as operators began to request ‘triple confirmation’ of apps purchases by SMS (as they did in Q309 when operators requested ‘double confirmation’), UBS thinks MOBI should be able to maintain a 75% bundle rate in China going forward. The bundle rate for MOBI’s Maopao Community for mobile on-line games and social networking has ramped up quickly. In Q410, approximately 16% of new handset users in China joined Maopao Community, according to the company. They think the ratio could increase to 30%+ in the next few years.

Expect mobile Internet to be the next focus of handset market
With new handset hardware features limited, improving user experience through software applications is becoming more important to handset vendors. Apple’s ‘App Store’ is the most successful example of selling such apps in the market. In China, UBS thinks domestic companies are better positioned to benefit from growth in the mobile Internet market. They believe MOBI will be one of the major beneficiaries.

Leading position
MOBI has installed its Maopao apps on more than 5,600 handset models. In 2009, it had more than 50% of the market by revenue. Given the industry’s high entry barriers, UBS does not expect new entrants to threaten MOBI’s leading position in the near term.

Notablecalls: As many of you know, Citron Research has been all over MOBI in the past days, causing the stock to drop from $22 to around $14-15 currently. Volume has ballooned up as shorts have established positions in this Chinese name.

Yet now we have a tier-1 firm out initiating coverage calling Sky-mobi Chinese equivalent of Apple 'App Store'. I'm pretty sure they wouldn't have initiated coverage if they had ANY doubts regarding MOBI's #'s. The environment is just too unforgiving when it comes to Chinese names.

I have no idea what the short interest looks like here but judging from the volume it probably stands around 30%.

A short squeeze may be in the cards today.

Calls of Note: Celanese (NYSE:CE) & OpenTable (NASDAQ:OPEN)

2011-05-05T08:30:00.002-04:00

- Goldman Sachs is upgrading Celanese (NYSE:CE) to Buy from Neutral with a $62 price tag (prev. $45) ahead of its May 10 investor day and following recent meetings with management, very strong 1Q11 results and forward outlook, and recent stock weakness. They now expect 2011/12/13 EPS of $4.56/$5.31/$6.17 (vs. prior $4.04/$4.79/$5.50). Goldman's based, 12-month $62 price target implies 32% upside from current levels, which they view as an attractive entry point. CE trades at only 8.8X their 2012 EPS estimate and the firm believes that CE warrants a higher multiple considering the evolution of its earnings mix shift to higher margin specialty chemicals and less from more commodity-like end markets.

Catalyst
Goldman views CE’s May 10 analyst day as a catalyst for: 1) management to revisit its 2013 segment EBITDA targets and/or introduce higher 2014 targets; and 2) investor awareness of the prospects for CE’s nascent ethanol opportunity, which they view as a “call option”. Beyond the investor day, the firm views CE as one of the best beat and raise stories in their coverage universe and they are currently 7% / 9% above consensus’ 2011/12 EPS estimates. They believe that consensus is overlooking recent moves in acetic acid prices, 2H11 strength from a major plant move/expansion, and CE’s exposure to the strong Euro.

Notablecalls: OK looking chart & a clear catalyst on the horizon. May see some interest. Note this is a dual call as the firm is downgrading Albemarle (NYSE:ALB).

- Merril Lynch/BofA is upgrading OpenTable (NASDAQ:OPEN) to Buy from Neutral with a $121 price target (prev. unch) nothing that while the stock could be volatile in near-term as Street digests the CEO change and the local deal (Spotlight) revenue opportunity reset, with OPEN down approx. 25% from its recent peak, they are upgrading to Buy with 35% potential upside to their target. The OpenTable penetration growth story remains intact based on solid N.A. restaurant adds in 1Q and Merrill's new consumer survey results, and they estimate a $1bn revenue opportunity assuming 70% restaurant penetration, up from $147mn in 2011.

Thoughts on management change
CEO Jeff Jordan announced his resignation as CEO/President in conjunction with the 1Q earnings release, but he will remain as Chairman. Firm thinks the company is in good hands with Mr. Roberts in charge given his in-depth knowledge of the company’s operations and financials, and they expect Mr. Jordan to provide counsel as needed. They expect the shock value of the new CEO to fade quickly, plus solid 2Q U.S. restaurant counts, to benefit the stock.

Proprietary survey supports OpenTable value to restaurants
Merrill's recently conducted a proprietary survey of ~400 consumers about their Internet usage habits, and their survey results support the value proposition of OpenTable. Roughly 40% of the respondents who use OpenTable indicated that they use the site to discover new restaurants, resulting in high incremental diners to restaurants on the site, $2,500 in estimated monthly incremental revenue, and a relatively high ROI for a restaurant on its OpenTable investment.

Maintain $121 price objective
OpenTable now trades near 32x Merrill's ‘12E US EPS (backing out $33/share for int’l value plus cash) vs. a peak multiple of ~45x, which they see as attractive vs. their 45% avg. 3-year North America operating income growth rate. Firm's $121 price objective is based on 50x our CY12 North America EPS estimate of $1.76 + $31 in int’l value, which represents 35% of the value of the North America business, plus $2 in cash. They see 35% potential upside to their target price.

Notablecalls: The name fell out of bed yesterday after the CEO announced his resignation to make time for his VC ops. I must say, it takes guts to upgrade this momo name here. Maybe the analyst is feeling good about himself for downgrading it back in April.

Nonetheless, I think OPEN is prone to bounce in the n-t. Short interest stands at 30%+

BRB

2011-05-04T14:18:00.000-04:00

Research in Motion (NASDAQ:RIMM): The bounce that wasn't

2011-05-01T13:03:00.003-04:00

The shock factor of RIM's guide-down pretty much outweighed the catalyst trade on Friday. All we got was a 1.5-2 pt squeeze at around open that did little else than bring in additional sellers.

I would have preferred a flush toward the $47+ level around open, followed by a nice 2-3 pt bounce throughout the day.

Sometimes it's all about the trading dynamics.

Sorry to be boring you with this on a Sunday.

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

2011-04-29T08:05:00.003-04:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2011-04-27T07:45:00.004-04:00

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

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

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

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

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

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

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

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

That would be $76+

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

QE3?

2011-04-26T13:44:00.001-04:00

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

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

2011-04-26T08:11:00.001-04:00

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

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

KEY POINTS:

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

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

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

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

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

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

But should one short the stock here?

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

Right?

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