InterOil Corporation (NYSE:IOC): Initiated with Overweight and $65 target at Morgan Stanley

Morgan Stanley is out with a major (not to mention gutsy) call on InterOil Corporation (NYSE:IOC) initiating coverage on the name with an Overweight rating and $65 target.

According to the firm, IOC’s business model has matured as interest in the story has waned. They see compelling risk/reward and believe IOC is poised for a major transformation — from a volatile, and often controversial, exploration-focused integrated oil company to a global LNG player with significant exploration upside in Papua New Guinea (PNG). Firm sees $5/share of value for existing downstream operations, with a call option on successful LNG development worth $60/share ($30 upside from current share price). Their price target offers 88% upside, and they see upside potential to their target as elements of the story derisk over time.

Morgan Stanley thinks capital markets do not fully value:
1) Potential of IOC’s discovered resource. We estimate in excess of 6Tcfe gas and 75MMbbls liquid.

2) Potential for resource monetization. IOC is in the final phases of due diligence with several companies on an upstream partnership and LNG venture;

3) Exploration upside. Morgan has a favorable view of current drilling potential of the Antelope-2 well and exploration potential in PNG.

4) Refining upside. They see refining upside for IOC as a niche refiner levered to economic growth in PNG.

Unnoticed positive exploration and development story creates a buying opportunity.
They expect the gap between improving fundamentals and the stock price to close as the new story is understood. Firm has investigated alleged negative claims, visited every IOC well-site in PNG, conducted due diligence, and analyzed the financials. They expect significant share price appreciation once the market begins to see evidence of transformation led by potential 2009 catalysts: success at Antelope-2 and a sell-down of IOC’s project interest.

Better Positioned Today
IOC appears to be better positioned for success than at any time in its 15-year history. As an early-stage exploration company with only 3 quarters of positive net income (and zero fiscal years), IOC has raised numerous financings from various parties since its inception in 1997 to fund operations and exploration.


- IOC’s resource estimate has risen from 0 in 2007 to 3.4Tcfe in 2008 to 6.7Tcfe post Antelope-1 in March of 2009.

- Its well results have been incrementally better from 2006 to most recent well in 2009.

- It is currently drilling another well into the Antelope structure that should be lower risk than its prior wells; it has the most visible catalysts in its history.

- It has a high probability of executing an LNG partnership to monetize its gas, they think.

Yet its stock is 35–40% off its 2005, 2007, and 2008 highs.
Morgan believes many investors may be associating earlier versions of IOC’s story with the stock while IOC’s position has materially improved. Their primary interest is the future and not IOC’s past.

Notablecalls: IOC is probably the most controversial Oil name out there. I'm sure everyone is familiar with the 'work' Fraud Discovery Institute has done in the name claiming IOC is a Ponzi scheme. This is partly the reason why none of the tier-1 firms have picked up coverage on the name.

And now MSCO comes out saying they have done lots of due diligence and they believe IOC is worth $65 here and possibly $100 if things work out well.

That's a blessing. They cannot afford to be wrong here.

IOC is surely a mover and will probably show its good side today. I would not be surprised to see a HUGE run in this one today and coming weeks.

Sandisk (NASDAQ:SNDK): Upgraded to Buy at Merrill Lynch; $30 tgt

Merrill Lynch/BAM is upgrading Sandisk (NASDAQ:SNDK) to Buy from Undererform with a $30 target (prev. $9.90).

According to the firm the new price target is derived from the average of our mid- and up-cycle fair values (vs. the average of trough- and mid cycle fair values previously). They target about 2x P/BV (PO implies 1.7-1.8x based on 2010-11E) vs. 2-4x during mid- and up-cycle periods (2002-07) or 1-2x in the recent downturn (2008-2009). Firm is no longer bearish on SanDisk. They now expect a solid earnings recovery in 2H09 and 2010-11. Merrill's new forecasts for OP and EPS indicate an almost up cycle level of earnings through 2010-11 – surpassing the previous upturn average (2006-07) but slightly lower than the 2005 peak. They revise their EPS estimates by more than 100% due to dramatic changes to ASP assumptions for SanDisk’s flash card products (about 30-40% higher for 2010-11 on a better supply and demand outlook for NAND chips).

Tight NAND supply presents new catalyst
SanDisk differs from typical OEMs such as Apple due to its captive chip production (JV fabs with Toshiba) and the option to purchase chips from Samsung. Consequently, the best case scenario for SanDisk should be a NAND shortage. Merrill's research shows tight supply of NAND due to chipmakers’ record low capex spending in 2009-10. Against this backdrop, they raise their ASP assumptions for SanDisk’s products by 30-40% for 2010-11, leading to EPS revisions of over 100% on a higher OPM (15-17% in 2010-11 vs about breakeven previously).

Financials and technologies look good.
Financial distress no longer concerns Merrill. SanDisk’s B/S remains healthy (over US$1bn net cash including long-term financial investments), despite large losses in 2H08-1H09. They also note the successful deployment of new technologies such as 3-bit cell (vs. MLC) and 32nm (vs. 43nm) – about one or two quarters ahead of Samsung. Firm thinks Korean chipmakers will focus more on DRAM capacity expansion vs. NAND due to relatively better margins and market share gains at the expense of Taiwan DRAM vendors. This also suggests upside to NAND.

Potential profit taking shouldn’t be a concern
SanDisk’s share price has doubled YTD along with NAND price strength. This may lead to profit taking among investors who bought the stock early this year. However, the current share price reveals low P/BV multiples (1.5x based on 2009E book) vs. its historical average (2.2x during 2002-07). The stock traded at 1x P/BV during the deep downturn in 2H08/1Q09, but Merrill's new forecast suggests better than mid level of earnings momentum or even higher than the previous upturn period (2006-07). Therefore, they think any profit taking driven stock price correction would offer a good entry point for new investors.

3Q results will be an earnings surprise?
Yes, Merrill expects SanDisk’s OP to exceed consensus (their estimate: US$138mn vs consensus: US$52mn) on upbeat ASP and well-deployed new technologies in JV fabs.

Notablecalls: Should cause a bit of a stir here. NAND players shut investments down which drives profitability (supply glut creating pricing upside). Hence the expected 'beat & raise' cycle.

Will it last? No way. History has taught us that the hard way. already.

I think SNDK can trade up 1.5-2 pts on this. After all, it's MLCO and $30 tgt.

BorgWarner (NYSE:BWA): Downgraded to Hold at Keybanc; expect a miss

Keybanc is out with a fairly interesting call on BorgWarner (NYSE:BWA) cutting their rating to Hold from Buy

Firm is lowering their earnings estimates to $0.07 from $0.27 for 2009 and to $1.35 from $1.58 for 2010 as they are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (Keybanc is lowering their 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.

Firm believes that the negative factors affecting 2Q09 and 3Q09 earnings (i.e., negative product mix, lower profitability in Europe, sluggish commercial vehicle sales, higher than expected interest and incentive compensation expense) could persist for several quarters before dissipating and becoming tailwinds in 2010.

- Keybanc now believes that increased production in A and B segment vehicles driven by European scrappage programs is masking the traditional seasonal declines in higher-end vehicles where BWA has majority of its content. So while European production is currently forecast to decline sequentially 2Q09 to 3Q09 by 4%, they expect BWA sales to decline by 8%. They do not believe the lowered expectations can be offset by North America, as improved production expectations are primarily driven by "Cash for Clunkers". Part of the sales declines may be offset by the increasing Euro, although limited profitability in Europe negates its impact to operating income.

- They believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group. Following better than expected reports from Johnson Controls (JCI-NYSE), Autoliv (ALV-NYSE) and Gentex (GNTX-NASDAQ), BWA reported 2Q09 recurring results of a loss of $0.05, which was significantly below both firm's estimate of $0.09 and the First Call mean estimate of $0.07. Sales declined 40% year-over-year to $916 million, well below Keybanc's estimate of $973 million and the First Call mean estimate of $970 million

While near-term Keybanc is incrementally concerned over worse than expected results, they continue to believe that longer-term BWA results will outperform expectations. As such, they believe that potential weakness in the stock price could present longer-term investors with a more attractive entry point than current levels.

Notablecalls: First of all, note that Autoliv (ALV) raised guidance this morning. So far, the stock is doing nothing. This is a tell.

I think BWA will work today to the downside as:

- Keybanc has a pretty good track record when it comes to auto parts.

- They are calling for a miss. Around these levels, this is unacceptable. People will be looking to book profits.

I think BWA can do 1-1.5 pts to the downside in the very s-t.

Genworth Financial (NYSE:GNW): Upgraded to Buy from Hold at Deutsche; $18 price target

Deutsche Bank upgrades Genworth Financial (NYSE:GNW) to Buy from Hold with a $18 price target (prev. $7).

According to the analyst the upgrade comes as as the $600 million equity capital raise further improves holding company liquidity. This should continue a virtuous cycle whereby the company’s cost of debt declines, the ability to refinance debt and extend credit facilities increases, financial strength ratings stabilize, and operating performance improves. Firm increased their target price to $18 from $7 as their primary concerns have diminished. Deutsche's EPS estimates were revised to factor in the capital raise and 3Q’09 mortgage insurance arbitration settlement.

No near-term pressure on the holding company
Following the equity offering, the firm estimates Genworth’s holding company has $1.5 billion of cash and short-term investments, which should be sufficient to meet debt service needs through the end of 2011. The next debt maturity is not until June 2011, which is a 57 billion yen security ($630 million). Genworth could also monetize its $1.5 billion remaining stake in its Canadian mortgage insurance business, if needed.

Capital shortfalls in the European mortgage insurance subsidiary would need to be funded by the holding company. That business has approximately $250 million of capital and $250 million of unearned premium supporting $6 billion of risk in force. Should any capital shortfall occur, Deutsche would expect the ultimate size to be manageable.

Further upside if life earnings power can be increased
To the extent the price increases, cost savings, and redeployment of excess liquidity in the life insurance business can lead to a higher ROE than firm's normalized estimate of 7% for Genworth’s life segment, the stock’s valuation multiple would have further to expand. The company is also increasing prices in its mortgage insurance and lifestyle protection businesses.

Deutsche expects the US mortgage insurance business to suffer from losses through the end of 2010; however, to the extent housing prices and unemployment stabilize in 2010, this business could return to profitability in 2011. Based on their expected losses through the end of 2010, the firm estimates the US mortgage insurance capital position would decline to approximately $900 million from $1.9 billion in 2Q’09. The risk in-force to capital ratio would increase to 31x, which would be above the maximum regulatory capita l ratio of 25x. The insurance regulators, however, have shown some flexibility as they are willing to let the mortgage insurers operate above the 25x ratio. Genworth’s mortgage insurance regulator in North Carolina passed such a law in July.

Notablecalls: While Barclays beat Deutsche to the punch 2 days ago (right following the offering) the call is likely to push GNW stock further higher.

I think $14 (or possibly somewhat higher) may be in the cards today as most of the other tier-1 houses still haven't upgraded their ratings or even adjusted price targets higher (most are in single digits). So playing Ketchup may be the theme here for quite some time.

Digital River (NASDAQ:DRIV):Upgraded to Outperform at Credit Suisse; $44 target

Credit Suisse is upgrading Digital River (NASDAQ:DRIV) to Outperform from Neutral with a $44 price target (prev. $37.50).

Firm notes that with reaccelerating year-over-year revenue growth forecasted for the second half of 2009 and 2010 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to near-term consensus estimates for the September quarter, they view the risk/reward of Digital River’s stock as attractive. Because of these near-term drivers, as well as their positive thesis regarding the company’s long-term growth opportunity as an On Demand e-commerce platform provider, they are upgrading Digital River from Neutral to Outperform.


Catalysts: For the September quarter, Digital River has guided to a 1.0% sequential increase in revenue at the midpoint, which is below average seasonal growth of 7.3% and management’s historical guidance of 3.2% sequential growth. Management suggested that the September quarter guidance was based on conservative assumptions for both the typical uplift from the back-to-school season and the annual product launch period of several of its customers experienced in September. Based on the on-time launch of Norton 2010, as well as both CSFB's checks and their analysis of retail sales data (suggesting that some back-to-school uplift has occurred), the firm believes that Digital River is well positioned to show upside to conservative guidance and consensus estimates for the September quarter.

Revenue & EPS Growth Drives Digital River’s Stock Performance
While potential upside to near-term estimates represents a significant driver for CSFB's raised rating, Digital River’s stock price performance often closely tracks the acceleration and deceleration of revenue and earnings growth. When they downgraded Digital River in September 2008, they were concerned that consumer software spending in the United States had slowed after a traditional boost to sales at the end of August and early September from back-to-school. Presently, however, CSFB's model forecasts a year-over-year reacceleration in revenue and EPS growth. Given that Digital River’s stock price has historically performed better in periods of high or accelerating growth—particularly EPS growth— they believe that Digital River’s current stock price represents an attractive entry point.

With two quarters of reaccelerating year-over-year revenue growth in the second half of 2009 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to consensus estimates and current relative valuation multiples below historical ranges, CSFB views the risk/reward of the stock at current levels as attractive. Furthermore, their confidence in their above consensus estimates that imply a reacceleration in revenue and EPS growth has been boosted by the on-time launch of Norton 2010, as well as both checks and analysis of retail sales data (suggesting that a somewhat normal back-to-school uplift occurred in August). As such, they believe that Digital River is well positioned to show upside to conservative guidance and consensus estimates.

Notablecalls: I like this call as:

- DRIV is a mover stock.

- CSFB has a pretty good track record covering DRIV

- The call makes sense (historical analysis & checks). CSFB is calling for better than expected results.

- DRIV, while not a direct comp to Omniture (OMTR), has long been rumored a takeover candidate.

- The stock has lagged the market.

All in all, I think DRIV will trade above te $37 level today and I would not rule out $37.50- $38.00 if the market continues to cooperate.

Amazon.com (NASDAQ:AMZN: Upgraded to Buy at Merrill Lynch/BAM

Merrill Lynch/BAM is upgrading Amazon.com (NASDAQ:AMZN) to Buy from Neutral with a $103 price target (prev. $95)

According to the analyst, the upgrade is based on six factors:

1) Leader in a growth sector – Merrill believes eCommerce sales will rebound to double-digit y/y growth in 2010, resuming the secular shift Online that was interrupted by the recession. Amazon has built sustainable competitive advantages in eCommerce including customer loyalty, distribution infrastructure, as well as technology investments, and these advantages have shown through with a sales gap to ecommerce growth between 1,700 and 2,800bps over the past six quarters. The gap shrank a bit in 2Q due to Amazon’s added exposure to video game category, but the firm thinks the gap could re-expand if the category improves (we have the gap shrinking in our estimates). This seems too conservative. Improvement in y/y industry growth to 11% in 4Q is driven by easy y/y comps. as well as assumption that the industry could see a normal 4% sequential growth in 4Q, consistent with 2006 and 2007.

2) Upside potential vs. eCommerce group - Merrill believes the street isunderestimating the potential eCommerce sector growth acceleration benefit for Amazon’s (just 54bp acceleration in 2010 growth vs. 2009 growth in street estimates) relative to other eCommerce stocks.

3) Positive eCommerce channel checks - online retail checks indicate accelerating growth for the sector driven in part by higher traffic conversion rates.

4) Positive seasonality – Amazon’s stock outperformed from Sept. 15th through Nov 30th in 2005-2008 and they think this year’s 4Q seasonal acceleration will likely be aided by easy currency comps.

5) Valuation upside based on history, with valuation support expected at 18x FCF. Amazon’s stock has traded at between 0.8x–2.0x sales over the past 5 years, and when company was beating estimates in 2007 stock moved toward higher end. Merrill believes a similar scenario could play out over next 12-months.

6) Competitive risks overblown, at least for next 12-months - Amazon’s stock has underperformed the Internet peer group since April due, in part, to competitive fears. This concerns have been driven by weaker media sales in 2Q (video game exposure) and a corresponding closing of US sales growth gap vs. eBay, loss of Target as a 3rd party partner in 2011, launch of Wal-Mart’s 3rd party online marketplace, and eReader announcements from Barnes and Nobel and Sony. Merrill believes that none of these competitive developments will impact Amazon’s sales in 2009 or 2010 (Wal-Mart’s sales are a small fraction of Amazon’s, and eBook sales barely impact Amazon’s total sales this year), with the outside possibility that Amazon lowers Kindle HW price to increase sales at the expense of margins. While there could be competitive margin pressure in sector long-term,Amazon’s customer, distribution and technology advantage position the company well long-term.

Notablecalls: So this upgrade follows similar upgrades in EBAY and YHOO over the past couple of days. The s-t risk here is AMZN gets bid up too far in the pre market (with large vol) and ends up like EBAY yesterday. EBAY got whacked soon after the open as people scrambled to take profits on a large gap-up.

So, I hope people will be somewhat more cautious today.

AMZN is surely the strongest mo-mo play in the group, so I suspect you will have to pay at least $85 to be involved.

I suspect it can do $86+ as soon as today. The stock's an animal! A-n-i-m-a-l! It has lagged the group and now the gates are open...

American Intl Group (NYSE:AIG): Bunnies!

Notablecalls: Bunnies!

Genworth Financial (NYSE:GNW): Target raised to $17 from $10 at Barclays

Barclays is raising their target on Genworth Financial (NYSE:GNW) to $17 from $10 following the company's announcement that it will begin on Tuesday a $500 million equity-raising effort. Even though the stock is being sold at a sharp discount from book value -- and that sale of shares, therefore, will reduce Genworth's book value per share by about 7% to roughly $25 -- firm views the equity-raising effort as part of a larger successful initiative that's been under way for some time at Genworth to right itself.

Indeed, earlier this year, when it looked somewhat questionable that Genworth would be able to redeem maturing debt, Barclays began applying a 50% discount to peers' price-to-book multiples in order to arrive at an appropriate price-to-book ratio for Genworth. Genworth seemed to be having problems on multiple fronts -- in domestic mortgage insurance, to be sure, but also in life insurance, long-term-care coverage, lifestyle protection, and on the investment side of its balance sheet. Since then, however, developments have turned decidedly more positive for the Richmond-based insurer.

Clear signs of housing-market improvement in Canada and Australia have emerged.
Prices have been increased in the company's Lifestyle Protection business that have helped to offset the drop in earnings associated with rising unemployment in Europe, especially in Spain and Ireland. Risk in the investment portfolio has been cut. Cash has been raised at the holding company through the sale of a minority interest in the Canadian mortgage-insurance operation.

Even in domestic MI, which has been the deepest source of Genworth's difficulties, things seem to be, if not getting better, then stabilizing. In particular, while prime-mortgage delinquencies and delinquencies from geographies outside the so-called SAND states -- Florida, California, Arizona, and Nevada -- are rising, delinquencies from the SAND states and on alternative products such as alt-A mortgage are falling, leaving the overall rate of growth in delinquencies flat. The average reserve per delinquency, meanwhile, has stabilized at about $23,000, a reflection of the shift of the delinquencies away from the SAND states, where claims have tended to be higher than elsewhere in the country.

Barclays' bottom line is that while Genworth is not yet on an entirely solid footing -- the June quarter showed continued cash outflows from many of its assets-under-management product lines, and the improvement in domestic mortgage insurance, while real, has nonetheless been modest -- they do view the company as better able to ride out the recession than they thought just a few months ago. Certainly the myriad actions the company has taken, which also have included sharp cuts in costs, have left the company in a far better liquidity position than it was in earlier this year, in our view. Holding-company cash now stands at $800 million, excluding the proceeds from the equity issuance that was announced last night. And that is after
having paid down debt. The company continues to experience difficulties but has exited its most challenging period. Firm's new higher price target of $17 reflects this improved reality. We reiterate our 1-Overweight rating.

Notablecalls: That $500 million equity offering has been in the cards for months. I got a heads up on it from a tier-1 firm sales guy about a month ago and was actually surprised it took so long to be announced.

So, anyway...here it is. It will put the co on a much more solid footing and that should be reflected in valuation.

Thomas Graff over at RM commented on Genworth bonds noting 5.75 due in 2014 traded many times in the last few days in the $79-81 area. Hearing post-common offering the bonds are bid at $87.

This one should trade up today.

eBay (NASDAQ:EBAY): Upgraded at Piper Jaffray and UBS

eBay (NASDAQ:EBAY) is getting two upgrades this morning:

- Piper Jaffray is raising EBAY to Overweight from Underweight while raising their target to $30 (prev. $19).

According to Piper the upgrade is based on their quarterly eCommerce survey which suggests recent changes made to the eBay marketplace could have a longer term impact on stabilizing the business. Also, web traffic data suggests slight upside to the September quarter.

Firm's proprietary quarterly eCommerce survey of 300 online shoppers shows 79% were 'satisfied' or 'very satisfied' with eBay, up from 70% the previous two surveys.

Web Traffic Improving. Data from compete.com shows unique users to eBay's U.S. site increased 12% y/y in August, up from ~5% y/y the prior 3 months. Piper is modeling for marketplace revenue to be down 8% y/y in Sept. Given GMV is the critical part of the equation, unique users are only a directional indicator toeBay's marketplace revenue.

Despite recent upgrades, Street is still largely neutral on shares.

Piper Jaffray Quarterly eCommerce Survey Shows Improved Satisfaction. Their proprietary quarterly eCommerce survey of 300 online shoppers shows 79% were 'satisfied' or 'very satisfied' with eBay, up from 70% in our June 2009 and March 2009 surveys, and 73% in our September 2008 survey. Firm believes customer satisfaction is a leading indicator of future sales because it leads to repeat sales, lower marketing spend, and better margins.

Web Traffic Improving, Suggest 1% Revenue Upside To September. Unique users to eBay's U.S. site are showing consistent signs of improvement suggesting upside to marketplace in the September quarter. Unique users in August increased 12% y/y in August, up from 8% y/y in May, 4% y/y in June and 3% y/y in July, according to compete.com.

Price Target. New price target of $30 (from $19) is based on a sum-of-the-parts valuation using 10x EBITDA for the marketplace business, 12x EBITDA for the Payments business, and a $2.75 billion valuation for Skype, in line with what eBay has an agreement to sell Skype for. We increase our target multiples from 6x previously, which the firm believes is fair for a high cash-flow generating business that is stable rather than in decline.

- UBS is upgrading EBAY to Buy from Neutral with a $28 price target (prev. $24).

Recent data from top eBay vendor ChannelAdvisor and other channel checks suggest eBay same store sales may be starting to turn a corner, coming in at +4.6% Y/Y in Aug vs -10% in Q1 and -5% in Q2. Upcoming changes including DSR updates, search enhancements, better dispute resolution tools, and improvements/expansion of Multi-Variable Listings should continue to drive transaction growth and accelerate Marketplace GMV. In addition, a renewed focus on the secondary market poses a positive long-term opportunity for the company.

Skype Sale Removes Overhang
While the P2P licensing dispute with Joltid is still a variable (eBay retained a 35% stake), UBS surmises that the buyers are familiar with both the technology in question and the Skype/Joost/Joltid founders given prior relationships, mitigating risk. Total consideration values Skype at $2.8B (14x ‘10E EBITDA) and the transaction allows eBay to continue investing in (and focusing on) its core ecommerce businesses.

Potential tough comps from cashback in Q4
eBay has benefited from Microsoft's Cashback Program to promote its search / Bing (one of the initial participants last year), so eBay could face tougher comps in Q4, especially as the program has expanded to 920+ vendors. Impacts could vary based on Microsoft’s pullback from, or investment into its Cashback Program.

Notablecalls: So, visitor trends are up and satisfaction is up. Skype overhang was removed 2 weeks ago. The stock is up ~ 10% since the announcement. I know some smart operators that bought EBAY on the day of the announcement and I suspect they will be using the upswing to sell at least some of their holdings.

I think eBay may have 1-2 pts of upside in it over the next couple of weeks (if the market holds).

Don't know what to do with the stock this morning. Maybe the open will offer a nice entry oppy.


PS: Yahoo (NASDAQ:YHOO) got an upgrade from Sanford Bernstein last night after market close. Outperform and $21 target.

First Solar (NASDAQ:FSLR): Downgraded to Sell at Soleil; target lowered to $96

Soleil's Princeton Tech Research is out downgrading First Solar (NASDAQ:FSLR) to Sell from Hold while lowering their target to $96 (prev. $170).

Even the best thin film manufacturer in the world is not immune to the effects of overcapacity and the downward spiral that is occurring in solar module pricing. While the firm believes FSLR will remain the low cost producer of a solar module over the next several years, the company is facing a much more difficult margin environment going forward and it is now done with the high-growth portion of its capacity ramp. With module pricing likely to remain under intense pressure through 2010, and little new capacity likely to come on-line through the end of 2010, they believe the risks to First Solar's earnings are to the downside over the next four to six quarters. They are reducing their price target to $96 - 17X Soleil's $5.65 per share estimate for 2010.

One Era Has Ended At First Solar; A Newer, More Difficult One is Beginning - The last three years has been characterized by: 1) Large subsidy programs (relative to the industry's production capability); 2) Steady to HIGHER module prices; and 3) Massive increases in FSLR manufacturing capacity (from three 25 MW lines to twenty-three 55 MW lines in a little over three years). Earnings increased explosively in this "best of all world's" environment. Over the next three years, we are going to see almost the polar opposite: 1) Small subsidy programs (relative to the industry's production capability); 2) declining pricing and margins; and 3) Relatively modest growth in FSLR's manufacturing output. With unit margins on each module declining and little capacity growth, Soleil believes the risk to First Solar's earnings are to the downside - the era of continual upside earnings surprises is likely over.

Soleil believes each of those factors is going to be radically different going forward. The next 12
to 18 months is going to be characterized by:


Subsidy Programs Becoming Small Relative To Industry Capacity – In a world where the solar industry was capable of producing roughly 2 GW per year of modules (2006/early 2007), the subsidy programs that drove the industry (Spain and Germany) absorbed all the modules that were produced. The first signs of danger for the industry became apparent in Q3 2008 (and had nothing to do with the global financial crisis) when Spain instituted a hard cap of 500 MW on its market for 2009. This was the first sign that subsidy programs for solar were not going to be infinite in scope. (It was a given that, at some point, we were going to discover that demand was not infinite...the only question was when). With the industry's manufacturing output scaling rapidly (toward 20 GW or more in late 2010), many producers in the industry have already confronted an environment in which they are not able to sell all they are capable of producing. It is worth nothing that in just the last three to four weeks, there have announcements relating to over 3 GW of thin-film module capacity that will be on-line/producing over the next 18 months - Nanosolar (private), Solyndra (private), Sharp (6753.T - Tokyo - Not Rated) and Showa Shell (5002.T - Tokyo - Not Rated) have all made announcements about large amounts of capacity that will be up and running over the next 12 months (cumulatively over 3 GW). Capacity continues to expand throughout the solar industry. With significant oversupply of modules now facing the solar industry for the first time, and many producers struggling to sell all the modules they are able to produce, the firm believe sthe odds are above 50% that over the course of 2010 First Solar will not be able to sell 100% of its manufacturing capability. The volume assumptions in First Solar earnings models are at risk to the downside, we believe, for the first time since the company came public in late 2006.

Rapidly Declining ASPs – The pricing environment in the solar industry has changed radically over the last year. The industry has moved from ultra-high pricing (driven, primarily, by an overly attractive subsidy program in Spain) to an environment of significant overcapacity that is forcing pricing and margins down at every step of the solar value chain. Crystalline module prices in the third quarter of 2009 are, Soleil estimates, going to be more than 50% below where they were in the prior year. Wafer, cell and module prices are now declining 20% or more per quarter, as the industry wrestles with a relentless expansion of capacity in the face of stagnant demand. First Solar's management acknowledged the reality of this changed environment on the company's second quarter earnings conference call by announcing that it would institute a rebate program on its module sales.

Crystalline-Module Pricing At No Premium - Thin-film modules must sell at a discount of roughly $0.07 to $0.10 per watt per efficiency point to compensate for higher balance of system costs. Assuming 14% to 15% module efficiency for the average crystalline module producer, crystalline module prices are now selling essentially at parity to First Solar's modules (just under 11% efficiency). As polysilicon costs continue to decline, and take crystalline module prices down with them, First Solar is going to have to reduce their module prices in response (as witnessed by the institution of a rebate program early in the third quarter.

Little Growth In Manufacturing Capacity at First Solar – First Solar's physical output of modules is not going to increase dramatically going forward – the company has stopped adding new manufacturing sites (it could gear up again at some point in the future, but we have now gone from one site with 7 lines to three sites with 23 lines – a more than seven-fold increase.) After a seven-fold increase in the number of production lines in just over two years, we are now entering a period where the number of lines the company is operating is basically not going to increase. The ending of ultra-rapid growth in unit output is a very significant turning point for First Solar.

Reducing 2009 and 2010 Estimates
Soleil is reducing their estimates earnings estimates for First Solar for both 2009 and for 2010 due to the increased downward pressure they see on pricing throughout the solar industry in general and at First Solar specifically. For 2009 they are reducing their estimate from $8.10 per share to $6.80 per share. For 2010 they are reducing their estimate from $8.25 per share to $5.65 per share

Risk to Consensus Estimates Is Now 90% To The Downside.
First Solar has surprised to the upside every quarter since it came public - usually by a significant amount. We just do not see that happening in the coming quarters. Looking forward into 2010, however, the company does not have the additional capacity coming on line to drive the monster "beats" to consensus expectations that have been its hallmark over the last three years. It is worth noting - in a declining ASP environment and with no significant capacity additions in the offing - that the current quarterly revenue and EPS estimates for the back half of 2010 (Q2 $585mm/$1.71 per share; Q3 $640mm/$1.88 per share; Q4 $686mm/$2.06 per share) imply the addition of roughly 50 MW of capacity each quarter (200 MW of annual capacity - each quarter) at high margins. Soleil believes that is extremely unlikely in the current environment and believe the risk to First Solar's consensus estimates are almost all to the downside.

Notablecalls: First of all, I'm sorry if I put out too many details. But this call from Priceton Tech Research's Paul Leming is just so good. Excellent job! If you actively invest/trade in the space I suggest you contact these guys.

Contact : PTLeming (a/t) PrincetonTechResearch.com

I think this call has the potential to hurt FSLR today to the tune of 5 pts (or more). The stock has bounced 15-20 pts from its current lows and it kind of looks like downside is coming.

The Street low target is currently $86 from Kaufman but they have messed up their timing badly so I would consider Leming's $96 the true Street low at the moment.

Potash (NYSE:POT): Downgraded to Hold at Citi

Citigroup is downgrading Potash (NYSE:POT) and Mosaic (NYSE:MOS) to Hold from Buy with POT's target lowered to $98 (prev. $115) and MOS seeing its target lowered to $54 (prev. $62).

Citigroup notes they recently conducted a proprietary farmer survey, talked to several US fertilizer distributors, and attended the Farm Progress Show in Illinois. Based on their discussions it seems that the fall fertilizer application season is likely to be weaker than expected. Firm's earlier thesis that farmers could not skip application indefinitely after taking a “fertilizer holiday” in 2008-09 still stands, but application may be delayed past fall, creating pricing risk in the near-term. This risk is magnified by the Chinese contract delays, debt-laden producers, and weaker farmer economics. As a result, they are moving to the sidelines on fertilizer stocks, although they don't see much downside in shares from current levels.

1. Fall Potash Applications Likely Weaker Than Expected – Growers in the cornbelt could be harvesting the crop 2-4 weeks later than usual, limiting the fall fertilizer application window. Dealer inventories are lean, but distributors the firm talked to weren’t worried about securing product given high producer inventories.

2. Chinese Contract Delays Create Price Risk – It was expected that the Chinese would come to the table after India settled at $460/mt. However the contract has been delayed and the Chinese could dangle the “volume carrot” to extract lower prices, a tactic India used in their contract.

Debt-laden Producers Threaten Oligopoly Pricing – A key tenet of our potash thesis was a strong oligopoly due to limited number of resource owners. However, Russian producer Silvinit showed its willingness to cut price to gain volumes in India, while K+S has added debt based on its acquisition of Morton Salt. In the India contract, Silvinit was able to boost its share of the Indian government contract over 2x (from 400kt in 2008 to 850kt in 2009) by cutting price.

3. Falling Incomes are Keeping Farmers on the Sidelines – Farmer incomes have fallen 38% Y/Y; many cornbelt farmers are losing money with current spot corn at ~$3.15, which makes them hesitant to spend money.

Notablecalls: Not a strong call. To be honest it reads like a 6th grade homework assignment.

Nonetheless I think it will work a bit here. After all, Citi has a pretty decent track record when it comes to Fertilizers.

The whole sector has been trading like sh*t lately, opening strong and fading hard. I suspect that given the market dynamics this one has potential to surprise...to the downside. One to watch!

American Axle (NYSE:AXL): Upgraded to Overweight at Barclay's; Actionable Call Alert!

Barclays is out with a major call on American Axle (NYSE:AXL) upgrading the shares to Overweight from Equal-Weight while raising their price target to $13 (prev. $8).

According to the firm the upgrade comes as the recent GM agreement and in their view, a strong likelihood of a bank deal should remove liquidity concerns, enabling investors to focus on AXL's earnings in a recovery, which they view very favorably. Firm is bullish about the prod. outlook for AXL's top platform, the GMT900, and believes the Street materially underestimates demand for full-size trucks in the context of a recovery in SAAR, likely marketing programs focused on large pickups, and a 1Q10 bottoming in construction employment. Benefitting from its large exposure to this segment and its large cost reductions, AXL could expand its EBITDA margin to the 13%+ range in 2010 and nearly 14% by 2011, yielding above-consensus earnings growth.

Barclay's expects AXL to beat the Street as early as this qtr, benefitting from a sharp rebound in pickups post clunkers and shutdowns. This could be a catalyst for the stock to rerate towards a valuation more in line with its peers, which trade at 5-6x 2011 EBITDA. Their new $13 PT is based on a still conservative 4.5x their 2011 EBITDA of $365mm.

Barclays is Bullish About the Outlook for GMT900 Production
Large pickup production is likely to be up materially in the second half of the year, in our view, benefitting from lean inventories and a potential pick up in sales pace. In August, the GMT 900 sales rate reached 810k units, or about 630k units when conservatively adjusted for cash for clunkers boost. While cash for clunkers mainly drove passenger car sales, the DOT reported 46,836 “Category 2” trucks (which includes pickups and large SUVs) were subsidized. Assuming that 85% were sold in August, and that GM had a 40% share, the potential GMT 900 cash for clunkers boost could be about 16k units, or 180k units on an annual run rate.

Several of the largest automakers have signaled in the past couple of weeks that they are seeing signs of improved demand for pickup trucks over the rest of the year.

As for GM, CSM recently raised its total GMT900 (pickup + SUV) production schedule for the rest of 2009 by about 50k units, with the increase taken more than entirely in 3Q, which was boosted from 119k to 174k units, taking its full year 2009 production to 643k units, in line with Barclays' virtually unchanged estimates.

They believe this sharp sequential rebound in pickup production, post clunkers and summer shutdowns, is not currently baked in the Street’s 3Q09 estimates for AXL, which could lead to a material earnings beat this quarter, although they expect continued restructuring costs (most of which will be subsidized by the new GM deal). Looking ahead, however, the firm is significantly more bullish than CSM on the mid- to long-term outlook for GMT900 production. Indeed, their expectation is that GMT900 sales should continue to represent around 6% of the U.S. SAAR going forward, calculated as GM keeping a 40% average share of the full-size pickup segment (which itself represents 11% of the SAAR), and a 65% of the large/luxury SUV segment (which itself represents 2.5% of the SAAR).

Focus Returns to Long-Term Earnings Power
Barclays believe that with its liquidity issues largely behind it, investors will now refocus on AXL’s longer term earnings power. Firm's bullish view on GMT900 production explains largely their well-above-the-Street AXL earnings estimates, and they believe that, as AXL delivers strong earnings, the stock could start rerating towards a trading multiple closer to that of its peers.

Firm expects AXL to beat Street expectations as early as this quarter, benefiting from a sharp sequential rebound in pickup production post clunkers and summer shutdowns. Based on a much stronger 3Q09 GMT900 schedule than previously expected, they now model AXL to generate $49 mil in EBITDA in 3Q09, representing a per share loss of $(0.10). This would represent a meaningful improvement versus the $(1.75) loss generated in 2Q09, and would be well above consensus loss of $(0.43).

More importantly, however, Barclays' earnings estimates for the next few years are well above consensus as well, reflecting the stronger GMT900 production we expect, as well as the material benefits they expect from AXL’s cost actions. They believe that AXL could generate $296mil in EBITDA in 2010, $365 mil in 2011, and 381 mil in 2012, up from just $91 mil expected this year. On an EPS basis, this represents $1.00 in 2010, $1.65 in 2011, and $1.80 in 2012, well above consensus of $0.73 and $1.30 in 2010 and 2011 respectively.

Notablecalls: I'm going to call this one Actionable Call:

- AXL has become quite a little performer. The stock is mover!

- Barclays' new $13 target is the new Street high.

- Barclays now expects AXL to beat the Street numbers on better than expected GMT900 platform sales. Who would have guessed? Really!

- Short interest is STILL sky-high at almost 32%. They need to start thinking about covering. It's death zone now.

- You're going to be in good company as SAC Capital Advisors recently filed a 13-D on AXL.

The stars have aligned, I think. This one is Actionable.

I expect the shares to trade way above the $7 level with $7.70-8.00 not out of the question. We may have another 15-25% upside mover on our hands today.

Good luck.

Ual Corp (NASDAQ:UAUA): Upgraded to Overweight at JP Morgan; Positive comments from Barclays

Airlines and particularly Ual Corp (NASDAQ:UAUA) are getting are getting some commentary this morning:

- Barclays is out saying they think many underestimate the potential for a significant airline revenue recovery, particularly for the legacy carriers. With recovery expectations muted, they think even a relatively modest recovery would pave the way for a profitable 2010 and materially higher share prices. They continue to favor legacy airlines over low-fare carriers, with top picks DAL and UAUA, the former getting no respect lately. Among the low-fare airlines, the firm also favors ALGT and JBLU.

Firm believes current thinking on the industry revenue environment and potential for recovery is very small relative to the potential. They understand that companies need to plan for a revenue environment that remains very soft. They also understand that revenue has been headed in a single direction (down) the entire year. While it’s easy to extrapolate these negative trends for a considerable period of time, the firm urges investors to consider two things

1) the market and the companies had little visibility into the speed or magnitude of declines in revenue earlier in the year (Figure 1), and

2) the history has several examples of rapid recovery off depressed bases (Figure 2).

July industry results combined with recent August revenue disclosures point to some evidence that a recovery in airline revenue has begun. They think near-term revenue data is likely to surprise many to the upside. Combined with increasingly easier comparisons, they expect those in the more bearish revenue camp will be forced to begin modeling some revenue recovery

Barclay's current forecast for UAUA calls for 200% raise in share price. Their price target stands at $19 per share.

- JP Morgan is out noting that for the first time in a long time, close-in estimates look about right, while 2010consensus could stand to improve, in their view. More importantly, assuming stable demand and fuel, they now expect winter to pass with nary a bankruptcy in sight, necessitating equity ratings upgrades for LCC and UAUA, downgrades for AAI and JBLU, as well as an overall improvement in both our sentiment and conviction. JP Morgan is upgrading their sector view from Neutral to Overweight.

Are they too late? True, the XAL has led other consumer indices since July, most indices since March, it but has seriously lagged year to date. Ignoring risk and the fragility of certain balance sheets, valuation for ALK is still highly compelling, followed by DAL and UAUA, then AMR and CAL, with LCC bringing up the rear. AAI looks more attractive than JBLU, though not wildly so. LUV is still expensive, in firm's view.

If it sounds like they’re more bullish, it's because they are
Winter is forthcoming. It will be cold. It will be long. But it is not expected to witness the level of upheaval that the firm feared just a few months ago. They simply cannot ignore recent economic data and growing evidence of global economic improvement. As such, they believe the industry is on the verge of turning a financial corner and would suggest that risk-tolerant investors begin adding more aggressively to their existing airline equity holdings. Chief among the near-term, potential catalysts to the upside are seemingly achievable 2H consensus forecasts, a potential shift from negative to positive management guidance, a JPM GDP forecast suggesting 2010 consensus has room to strengthen, and a continued improvement in sentiment as forecasted winter bankruptcy risk wanes.

Close-in estimates look about right; some airlines might actually guide up. For the first time in roughly a year, we don't differ materially from near-term consensus. Better yet, demand may have slightly exceeded initial management forecasts, while weather and fuel appear to have cooperated. Delta is among the more likely to slightly boost existing margin guidance, as well as potentially JetBlue. JP Morgan is not looking for huge improvements, though the passing of seemingly perpetual downward guidance may be greeted
enthusiastically by the market.

New ratings. As a potentially challenging winter approaches, United may occupy the capital-raising spotlight more than others, particularly LCC, in JP Morgan's view. As a result, their UAL Corp (NASDAQ:UAUA) equity rating moves from Underweight to Overweight on the expectation that sentiment improves with each liquidity salvo they fire, whereas LCC moves just a single notch up to Neutral given still-limited liquidity options should fundamentals fail to improve. Countering these changes are downgrades of AAI and JBLU from Overweight to Neutral, despite still attractive risk-reward and healthy potential upside to price targets. These are relative ratings, after all, though the lower perceived risks of AAI and JBLU argue strongly for their continued inclusion in a basket of equities, in their view, or for those lacking the stomach for material risk and volatility.

Lastly, valuations look reasonable (or downright cheap, if one believes in V-shaped demand recovery), particularly EV/EBITDAR for ALK (2010 EBITDAR on 2009 cap structure), followed then by DAL/UAUA, then AMR/CAL, with LCC and the Discounters bringing up the rear. Accordingly, the firm believe now is the time for investors to begin adding aggressively to their existing airline equity baskets.

New price targets are below:

Notablecalls: UAUA is going to fly again. I'm guessing at least 12-15% upside move today with 15-25% upside not out of the question. So, $7.50 -$8.00 is the range we are talking about here. There's a 22% short interest in the name.

Both JPM and Barclays are now outright saying they expect upside surprises in Airline earnings. When was the last time we saw that? I surely can't remember.

These two calls will put fire under the Airlines today. UAUA, AMR, LCC are the ones to keep on the radar.

Fortress (NYSE:FIG): Upgraded to Overweight at Barclays; target to $9

Just a quick heads up,

Fortress Investment Group (NYSE:FIG) is upgraded to Overweight from Equal Weight while raising their target price to $9 (!) from $3.

- Firm notes the revised price target is based on 18x their 2010 EPS of $0.48, whereas their prior price target was based on 11x firm's previous 2009 EPS estimate of $0.27.

Notablecalls: Note this call is part of a larger Alternative Asset managers call but FIG kind of stands out with the upside.

I think FIG can go to $5 (or higher) following this call.

United Parcel (NYSE:UPS): Upgraded to Overweight at JP Morgan; $70 target established

JP Morgan is upgrading United Parcel (NYSE:UPS) to Overweight from Neutral this morning. They are raising their price target to $70 (prev. $57)

Firm notes they believe that UPS is viewed as a defensive transport name with less operating leverage and that this perception has been a major driver of the underperformance in UPS stock versus most other transports in 2009TD. In their view, UPS stock has lagged too much, and the stock does not reflect the boost a turn in the U.S. economy would provide to UPS earnings performance and to the stock. They are upgrading UPS from Neutral to Overweight.

Raising rating to Overweight as reward / risk is attractive. Relative to most other transports and many industrial stocks, JP Morgan believes that UPS reflects less anticipation of a turn in the economy, and they believe potential downside risk for UPS stock is modest, while upside potential is significant. They are upgrading UPS to Overweight from Neutral because they believe there is room for UPS stock to reflect a stronger expectation of a cycle turn in order to be consistent with the anticipation reflected in other industrial and transport stocks. They also believe UPS’s operating leverage in a turn may surprise on the upside.

Catch-up opportunity is meaningful—UPS has lagged 80% of S&P 500 Industrials. Based on 2009TD performance and also the % move of stocks off their 12 month lows, firm's analysis shows that UPS stock has underperformed about 80% of the industrial stocks in the S&P 500. While underperformance versus higher beta names makes sense to some extent, they believe that UPS’s earnings will respond earlier in the cycle relative to many industrials, and the underperformance appears overdone.

Operating leverage in 2010 could surprise to the upside. The two-year ~600 bp decline in UPS’s total operating margin in 2009 vs. 2007 reflects a much sharper decline in margin performance than we have seen in the past due to both lower revenue and also the effect of unfavorable labor mix (union seniority). While UPS is not typically viewed as a name with operating leverage, JP Morgan believes that gradual reversal of unfavorable factors that drove margin pressure could provide greater than expected margin upside in 2010.

Incrementally positive transport data points are good for UPS. While there is not yet a strong turn in transport demand, rail weekly volumes, IATA monthly freight data, and truckload company comments point to incremental improvement in demand. JP Morgan believes that gradual improvement in parcel /express volumes is also likely.

They are introducing their 2011 EPS estimate of $3.50/share and Dec 2010 price target of $70. JP Morgan's new price target is based on applying a 20x P/E multiple to 2011 estimate of $3.50/share.

Notablecalls: I like this call as JP Morgan has done a good job covering the space. They upgraded Fedex (NYSE:FDX) in late June around $50 and the stock is now trading around $70. FDX is generally considered a better name so upgrading it ahead of UPS made sense (& it clearly worked).

So now it's time to upgrade UPS, the lesser peer. I suspect this too will work. The upside to JPM's $70 target price is solid and will attract buyers.

All in all, I think UPS can trade up towards the $56 level in the very n-t. Ketchup!

PS: Note how UPS's rolling fwd P/E has almost always lagged FDX's. Only over the past months the ratio has dipped below 1x level.

MEMC Electronic (NYSE:WFR): Upgraded to Outperform at FBR Capital

FBR Capital is upgrading MEMC Electronic (NYSE:WFR) to Outperform from Market Perform and raising their price target to $22 (prev. $16).

Firm notes their checks last week in Taiwan indicated that MEMC Electronic Materials not only has been able to gain considerable market share in the solar side, it also has been able to regain some of the semi market share lost a few years ago in Korea and Taiwan. Yes, such share gains have come at the expense of lower margins (versus historical trends, especially following past recoveries in the semiconductor industry). However, FBR Capital believes the gains are already baked into expectations and share price, as the company, in their view, set guidance low enough to be able to execute successfully. Moving forward, and consistent with FBR's solar industry thesis, they expect the overall GM to peak in the 30s, nowhere near the 50%-plus when poly was sold into the spot market at exuberant prices. However, they believe the new management "gets it" that both solar and semiconductor industries are commodity-type industries, and thus the inflated GM profiles of a few years ago will not happen again—at least, the firm does not expect that. Thus, given the higher semi and solar wafer shipments, because of QOQ increase in end-market demand along with material share gains and some margin improvement, and because of higher unit shipment, they are increasing their CY09 revenue/EPS estimates from $1,177M/$0.15 to $1,204M/$0.20, while CY10 estimates also increase from $1,691M/$1.02 to $1,700M/$1.07. Given the higher estimates, as well as increased confidence that share gains will help MEMC to grow faster than the industry average, the firm is also raising their rating from Market Perform to Outperform and increasing their price target from $16 to $22, or 2x EV/sales and 8x EV/EBITDA, versus the peer group (GCL, Shin-Etsu, Sumco, Tokuyama, Wacker, and REC) average of 1.7x EV/sales and 6.0x EV/EBITDA.

- Semi market dynamics. As FBR noted in their TSM and UMC notes this morning, they believe that foundry wafer starts have continued to improve. Although some seasonality could impact the QOQ wafer starts during the 4Q–1Q period, thus adversely impacting raw semi wafer demand, they believe that MEMC has been able to regain some of the market share it lost a few years ago in Korea and Taiwan.

- Given the larger semi and solar wafer shipment, driven by end-market demand improvement along with market share gains, they believe MEMC is currently on track to exceed current consensus estimates for 3Q

Notablecalls: Expectations regarding WFR's n-t performance are low here and FBR's call will make a difference .

I think WFR can trade up 1pt today (towards $17.50 level) and possibly to $18 in the coming days.

I'd love to hear what JP Morgan Semi team will come up with (they have been very neg. on WFR lately).

General Electric (NYSE:GE): Upgraded to Overweight at JP Morgan; $17 target

JP Morgan is upgrading General Electric (NYSE:GE) to Overweight from Neutral and raising target to $17 (prev. $12).

Firm notes the the downside here looks attractive versus others that have run, which, combined with an ongoing discount for sentiment, sets up for an interesting relative risk/reward, in their view. Given the recent run in the most disliked stocks, and how quickly sentiment has turned, they would rather be early, especially for one such as this that has underperformed for such an extended period of time, and for which there has been arguably the most controversy. In short, the firm thinks this is one of the last “non-consensus, a little good news can go a long way” stocks in the group.

Starting point: Negative sentiment and under-performance. GE is now among the lowest-rated stocks in our sector (only 30% Buy) with ongoing fear around GECS. Since June ’08, it’s down 55% vs. the group’s -35%, and down 68% vs. the group’s -43% since GE’s peak in October ’07.

Yes, GE was as “too big to fail” as anyone, but this point is moot: There are a few things JP Morgan acknowledges, which are in line with their formerly bearish thesis. First, it’s likely the company would be in far worse shape if not for some extraordinary government help from the TLGP and CP guarantee programs, and they believe GE will go down as the least publicized “too big to fail” story in the crisis. Second, without the unusually large tax synergies, which should have been explained as the key reason why GE Capital will maintain its book earlier than this March, GE Capital would be eating into equity as they speak. These issues are what they are, however, and have little to do with the forward fundamental trajectory, which they think has the chance to not be as bad as stubbornly low expectations.


Wall of worry intact at GECS . . . Concerns include 1) provision/impairment levels, 2) rising funding costs, 3) regulatory uncertainty, and 4) mark-to-market risks (CRE), all of which add to questions around LT earnings power.

. . . but they feel comfortable their expectations are conservative . . . 1) On losses, the stress case looks reasonable; 2) Firm assumes a $10B infusion; 3) rising funding costs hit ROI by ~70bps, manageable; 4) forecasted 10%+ TCE by ’12 should satisfy regulators; and 5) with depreciation/impairments, CRE equity holdings should go to FMV gradually by ’12. In the end, the firm sees a pathway to $6B in normalized earnings here, a 1.4% ROI (1.2% ROA), below guidance of 2%.

. . . while investors may already be numb to the worst case. Similar to the stock dynamics around the dividend cut/AAA, even if something bad happens on one of these fronts (like a capital raise), it may not be all negative, as none are likely to critically destroy value long term. JP Morgan thinks risks to their estimates are to the upside, including an earlier peak in losses, or upside industrial FCF/asset sales that eliminate the need for a capital raise.

Industrial fundamental visibility low, but they could be done cutting estimates. JP Morgan remains Street low at $0.60 in EPS for ’10, the trough, and data points from here could point to “stabilization.” Importantly, their normalized EPS is based off of this conservative trough.

NBCU, an auto/housing play, bottoming, undervalued. Signs of life in media M&A may rekindle hopes of a strategic move at NBCU. They think a move here could unlock ~$30B of value, meaningful at ~20% of GE’s market cap, and a significant positive given mixed recent history.

Not expensive on trough/normalized EPS. Firm sees support at ~$12, or 17x their conservative trough, with a best case at ~$20. They peg fair value and their PT at ~$17, enough to justify their OW in the context of an overvalued group.

Notablecalls: I think GE will be up around 5-6% on this. JP Morgan is a solid player and their calls matter in the space.

Don't buy too high because the open usually provides a nice entry in GE.

American Intl Group (NYSE:AIG): Downgraded to Underperform at Credit Suisse; target lowered to $15

Credit Suisse is out downgrading American International Group (NYSE:AIG) to Underperform from Neutral while lowering target to $15 (prev. $30).

Firm notes they are lowering their 2009E to -$13.98 ($2.80 for 2H09) and initiating a 2010E at $5.70.

CSFB's Underperform rating reflects: 1) Near term monetization of value of businesses suggests little to no value for common equity, 2) book value analysis suggests mid-teens stock, 3) distressed tender of hybrids – a book value and recap opportunity, 4) normalized capital structure yields annual EPS of $1.50 to $2.50, 5) upside-down capital structure with large debt load vs. common equity, 6) ample liquidity, but near term debt maturities may increase reliance on fed line, and 7) use of government funds.

New CEO Benmosche a positive, but low probability of meaningful common equity value: The recent rally of some of the more distressed financial stocks, the arrival of new CEO Bob Benmosche, and the potential prospect of slowing the disposition of some of AIG’s businesses have all contributed to the recent large move in the AIG stock price. But the firm doesn't expect that a 2- to 3-year process will render upside value for common equity holders, and they note the risk of further erosion of franchise value and the intention of the government to be a bridge rather than a permanent stakeholder suggests meaningful asset sales/IPOs need to occur over the coming 12-18 months.

Firm's $15 target price is derived from a ~1x estimated tangible book value ex. AOCI and 7x to 8x their estimate of EPS with a normalized capital structure.

Notablecalls: Another blow to AIG. The tape is strong this morning offering the early birds an oppy to short AIG above Friday's closing price.

CSFB brings little new to the table but it looks like they were at least partially right on the stock with their $30 tgt. Now this gets lowered to $15.

Abercrombie & Fitch Co (NYSE:ANF): Downgraded to Sell at Citigroup; $24 price target - Negative Earnings Revisions Likely Ahead

Citigroup is out downgrading Abercrombie & Fitch Co (NYSE:ANF) to Sell from Hold while lowering their price target to $24 (prev. $33).

Firm notes they lower their rating to Sell as they believe that ANF will continue to experience deteriorating same-store sales due to problems beyond pricing & newness as ANF’s proactive promotional stance during back-to-school shopping season is not supporting improved sales productivity. Sales shortfalls will likely lead to continued negative EPS revisions. They are also incrementally concerned due to Aug. weakness in key back-to-school items, i.e. graphic Ts, knit tops, & denim, which does not bode well for 2H09 & expect 3Q09 comps of (22)-(24)%. ANF’s Aug. comp was -29% (vs. -30% in 1Q09 & 2Q09) despite 4 point easier comparison in Aug.

In firm's view, sales shortfalls at ANF will likely lead to continued negative EPS revisions. They acknowledge that ANF’s overall comparisons become 3 points easier in September and 13 points easier on a 2 year basis; however, they believe comps are likely to continue in ~-20% range as less bad traffic may not offset lower average unit retail price (higher promotions).

Lowering EPS Estimates and Target Price — Citigroup is lowering their 3Q EPS est. to $(0.01) from $0.18 on a (22)-(24)% comp, gross margin -270bps, and SG&A dollars of $466mm. Their new 4Q EPS estimate is $0.98 from $1.15 on a (9)-(11)% comp, gross margin +40bps, and SG&A dollars of $489mm. Target price is lowered to $24 (from $33) on ~16x 2010 EPS est. or ~4x 2010 EBITDA.

Citigroup Thinks Bull Case Is in Their Low Ests — They acknowledge ANF bull case which assumes less bad comps, 4Q/2010 int’l rev. benefits, & tailwinds from RUEHL closing. They believe their EPS outlook adequately incorporates these factors yet new 2H09 EPS est. is $0.97, or 25c below Street’s $1.22. Firm speculates that shuttered windows at ANF concepts could deter traffic. ANF may need more open exposures in addition to lower AUR and new fashion to boost sales.

In Citi's view, ANF is experiencing deteriorating same store sales due to problems beyond pricing and newness as ANF’s proactive promotional stance during the backto- school shopping season does not appear to be driving improved sales results. Female customers in particular may prefer faster fashion and more SKU variety (i.e. Forever 21), and they do not believe ANF is set up for this change in consumer preference.

Problematically Late to Sourcing Revisions — Also, in firm's view, ANF appears late vs. competitors at securing lower product costs as specialty comps (i.e. GPS, AEO, PLCE, URBN, and LTD) are seeing product cost savings in 2H09 or sooner while ANF did not appear to source into lower prices until 1H10. Management indicated it continues to review pricing on an ongoing basis and is reducing AUR but will be most dramatically reducing AUR at Hollister and abercrombie kids.

Notablecalls: This is a fairly strong call from Citigroup's Apparel Retail team. Their new price target for ANF is way below market and that should send shivers across shareholder base.

ANF reported weaker than expected comps yesterday morning and this looks to have triggered the downgrade. I guess Citi had been looking for some improvement but after the miss they decided to throw in the towel.

What to do with the stock? I guess its a short anywhere above the $30 level.

Note there's a 18% short interest in the name so don't expect it go down without a fight.

Freeport-McMoRan (NYSE:FCX): FCX could raise its overall 2010 copper sales guidance - FBR

One of the more interesting calls today comes from FBR Capital:

FBR is raising their tgt on Freeport-McMoRan Copper & Gold, Inc. (NYSE:FCX) to $87 from $69 and reiterating their Outperform rating on the stock.

According to the firm the higher price target primarily reflects their view that FCX would raise its overall 2010 copper sales guidance by about 12% (or, approximately, a 45% increase in North America) after recent improvement in leading economic indicators for the developed economies, such as the U.S., Europe, and Japan. Furthermore, FBR believes the economics of increased production are also justified at current copper prices and with the strong outlook in 2010. Based on their revised commodity price deck and increased production estimates (2010 only), they also increase their 2009 and 2010 EPS/EBITDA estimates by about 24%/16% and 26.5%/12%. Firm recommends that investors take advantage of market volatilty to accumulate FCX shares. Their price target of $87 is based on 6.0x revised 2010 EV/ EBITDA, and the stock is currently trading at 4.4x 2010E EV/EBITDA.

Model North American operations to ramp up in early 2010. FBR is increasing their estimates for FCX's North American 2010 copper sales by 45%, from 1,000M lbs to 1,450M lbs, reflecting their view that FCX's management will decide to ramp up its high-cost North American operations, which it partially curtailed in 2H08 and 1Q09. Firm believes that 1) the improving macroeconomic indicators in the developed world suggest sustainability of demand and 2) the runup in commodity prices justifies the economics of North American operations. Both factors should provide management enough comfort to take decisions in favor of restarting its curtailed capacity in North America.

Raising 2010 copper price forecast. FBR is increasing their 2010 copper price outlook modestly by $0.10/lb to $2.70/lb, which reflects the increased marginal costs as some high-cost mines are brought back on line to meet the improved demand levels. They are also increasing their 2009 commodity price estimates by 6.5%, to $2.28/lb, primarily to reflect recent strength in commodity prices. Firm continues to emphasize that investors should focus on the supply risks to copper, which should allow the commodity to trade at a premium to other base metals.

Background of North American Production Cuts
In late 2008, as financial crises impaired global demand for copper and commodity prices crashed, Freeport-McMoRan laid out aggressive production cuts at its high-cost mines (mostly North America) by making operations lean, revising the mine plans, and deferring project starts. It lowered its 2010 sales guidance by as much as 44% in North America over a period of three months to match the reduced demand.
FBR notes that the first production cut was announced assuming an operating scenario with a $1.50 to $2.00/lb copper price. This implies that, at such copper prices, Freeport-McMoRan would be comfortable operating at a 1,200 Mlbs annual rate in North America. With current copper prices at, approximately, $2.80/lb (FBR forecast of $2.70/lb average copper price in 2010) and improving macroeconomic indicators in OECD countries offering hope of additional demand (outside of China), they feel comfortable with their assumption of increased output from the North American mines—a decision Freeport-McMoRan could announce before the end of 2009.

Notablecalls: First of all, I must admit trading commodity stocks isn't exactly my cup of tea. I almost totally missed the C2008 decline in many of the names playing mostly bounces while shorting would have yielded 10x the profit.

Yet, FBR's comments regarding FCX raising its 2010 copper sales guidance caught my eye. Especially in light of Alcoa (NYSE:AA) raising its Aluminum guidance last night.

FCX /Copper has become somewhat hated lately and I suspect shorts have positioned themselves ahead of the ever coming decline. Positive news/comments are likley greeted by short squeezes.

I'm not going to set a target range for FCX here but I think there is fair chance of the stock moving higher today and in the n-t.

Take it with a pinch of salt.

American Intl Group (NYSE:AIG): Ugh!

Notablecalls: Wet Kitties...they are everywhere! ARGHHHH!

Textron (NYSE:TXT): Upgraded to Conviction Buy at Goldman Sachs

Goldman Sachs is upgrading Textron (NYSE:TXT) to Conviction Buy from Neutral and raising price target to $23 (prev. $16)

All of TXT’s cyclical businesses (Cessna, Industrial, TFC) are at or near trough and likely turning the corner, valuation is compelling, and catalysts lie ahead. The three key drivers of the upgrade are:

1) business jet data likely keeps improving in 2H09/2010,

2) Industrial could surprise to the upside near-term given that 60% of revenue is from Autos, and

3) continued credit and capital market improvement means more run-off success, potential asset sales, and liquidity enhancements.

Catalyst
The following could act as positive catalysts and drive shares higher, 1) TXT’s Analyst Day on Sept. 9, 2) improved Auto production driving upside at Industrial, given that 60% is Auto, 3) business jet data continuing to improve, 4) asset sales or additional liquidity related events could occur by year-end as credit markets keep improving.

They have raised their 2009/2010/2011E to $0.10/$1.15/$1.75 from $0.00/$0.80/$1.45, driven by stronger Industrial Auto growth, a faster recovery in Cessna margins, and fewer losses at TFC.

Cessna near the trough
During the 2Q earnings period a number of companies with business jet exposure alluded to early signs of a turnaround in the business jet market; rates of decline in flight hours slowing, inventory levels declining, secondary market values firming, modest order activity coming in, and cancellations declining. Firm's conversations with business jet OEs and suppliers, as well as their channel checks in the market, indicate that conditions have continued to improve further since 2Q end. Goldman therefore believes it is likely that Cessna reports further improvement in order and cancellations rates when it reports 3Q, and makes little to no change to its production forecast.

As shown in Exhibit 1, business jet shipments are highly correlated with corporate profits. Goldman's expectation is that both are at or near the trough. Exhibit 2 shows the Cessna book-to bill, which has been extremely weak YTD as cancellations have meaningfully outpaced orders. They expect book-to-bill to improve moving forward, and the history lesson tells us to buy Aerospace stocks at the order trough

Industrial could surprise on the upside given Auto exposure
With all the focus on the liquidity plan, TFC and the business jet market, it is easy to forget that Textron has an Industrial business, where 60% is Kautex which is a supplier to the Auto industry. Goldman believes the recent uptick in Auto production has the potential to positively impact TXT's 3Q results, and to drive a faster than expected recovery in 2010.

The Defense business has some unique drivers
While the firm maintains a Cautious view of the Defense sector, almost every company in or Aerospace coverage has a Defense component, and they're of the view that Textron's is less meaningful to the total company, and that it has some unique growth drivers that should allow it to continue growing positively, even if they see meaningful declines in broader Defense spending.

Liquidity plan a huge success, TFC losses have likely peaked
To-date the liquidity plan has been substantially more successful than the market anticipated, and they believe Textron now has ample liquidity. With $2.1bn of Distribution receivables left, we believe the cash conversion rate (which has been in the 90% range in both 1Q and 2Q) on the receivable run-off can remain strong for the remainder of 2009, which means another place the firm sees more positive news ahead.


The stock currently trades at 0.6x revenue. If it were to trade at its historical average of 0.95x revenue, there could be even more upside than our price target implies.

Notablecalls: First of all note that Morgan Stanley upgraded TXT to Overweight from Underweight yesterday morning calling for a potential double over the next couple of years. That was a fairly powerful call that sent the stock as high as $16.60 intraday.

And now we have Goldman Sachs out with a Conviction List upgrade calling for a 50% upside in the next 12 months.

That's like getting blessed by the Pope himself.

I think there will be some spillover effect from MSCO's call yesterday as some fund managers and their analysts studied the call and will submit orders today.

All in all I think TXT will fly on this. I'm guessing if the market holds we will see another attempt toward $16.60-.75

American Intl Group (NYSE:AIG): Meow 2!

Notablecalls: It works!

American Intl Group (NYSE:AIG): Meow!

Notablecalls: Long AIG - tail coming along! Actionable!

Rambus (NASDAQ:RMBS): Judge Pushes Trial Date Due to Attorney's "Grave Condition" - We See no Change in Legal Position - Reiterate Strong BUY

Capstone Investments is out defending Rambus (NASDAQ:RMBS) this morning:

Samsung Attorney’s health merits continuance. Yesterday, during hearing in RMBS’s upcoming Anti-Trust trial, Judge Kramer pushed trial date from Sept. 28th to Jan. 11th, 2010. Trial date was moved due to “grave condition” of Samsung attorney. Judge Kramer felt that beginning trial in ’10 was likely the best choice as he didn’t believe he could provide Samsung proper time to bring new attorney(s) up to speed, while also avoiding any rollover into holiday season. Given timing of prior Sept. 28th date, any delay in starting trial would likely pose issues in jury selection as holiday period would likely interfere. Other than timing the firm sees little impact from yesterday’s ruling. Capstone believes RMBS’s case remains intact, and sees no change in legal position

ITC case provides potential near-term catalyst. While RMBS’s Anti-Trust trial has been the primary focus of investors, its proceedings vs. NVDA in ITC could offer potential near-term catalyst. Based on recent ITC Markman ruling, which Capstone views as a landslide for RMBS, we believe NVDA will likely need to settle with RMBS or risk potential injunction, and injunction of its customers (HPQ, MicroStar, Asustek and others). Hearing before Judge Essex is currently scheduled around Oct. 12th. In firm's opinion, any settlement would likely occur prior to hearing. While not equal in dollar size to upcoming Anti-Trust proceedings, they believe NVDA settlement could equal ~$1B+

Reiterate Strong BUY – Delay likely has little impact in final outcome. Firm believes investors have a “shoot first” mentality with regards to RMBS legal developments. While likely prudent, they believe after hour sell-off assumes a change in RMBS legal position or eventual Anti-Trust outcome. They see neither and believe investors should use weakness as buying opportunity.

Notablecalls: Talking to a senior NCN (Notable Calls Network) member who bought RMBS around $16.50 this morning. He says RMBS will bounce. When he speaks, I listen.

FYI