Monday, July 31, 2006

Interesting Call of The Day - Marchex (MCHX)

Standford Financial Group's Clayton F. Moran is out with an interesting comment on Marchex (NASDAQ:MCHX) noting the stock has been cut in half due to: 1 nil a lack of financial upside to estimates; 2 nil the overall stock market weakness including a rotation away from technology; 3 nil seasonal slowness in Internet activity and stock performance; 4 nil concerns about a second quarter miss.

Moran believes the current stock price represents a great buying opportunity. Marchex will report on Tuesday August 8, after trading. He expects the results will be in-line with current street consensus (revenues of $32 million, OIBDA of $9.7 million and adjusted EPS of $0.11). This could result in a relief rally as some investors fear a miss.

The summer is the seasonally slowest period for Internet activity and Internet stock performance. We anticipate that this stock will begin to recover as investors turn their attention to the end-of-the-year holiday period, which will likely remind them that online, and especially search, advertising continues to grow rapidly.

Marchex is developing a local advertising network online through the integration of its zip code and direct navigation sites with its recently purchased open list local search engine. We believe that along with enhancements to its websites, the local orientation of many of the sites will drive growth over the next several years.

Marchex is a high-growth Internet stock trading at a nonilgrowth Radio multiple. Marchex is currently valued at only 11x 2006E OIBDA while mature, no-growth media assets like radio are valued at 10x. If the stock continues to languish, the analyst believes private-equity and/or other media companies may find it attractive.

His price target remains $25 per share. Recommends investors Buy MCHX at current levels.

Notablecalls: Looks like an interesting call.

Calls of Note Part 5

- CIBC thinks Coventry's (CVH) stock should have been up on Friday, because it beat expectations handily on the strength of a much better than expected commercial MLR, and CVH's quarter displayed none of the pricing or cost issues discussed by Aetna that spooked the market on Thursday.

Pricing exceeded cost trends by 370 basis points this quarter; the huge positive spread should narrow over the rest of the year, but Coventry's guidance is conservative, since it assumes the spread essentially disappears over the next two quarters, and the firm sees no reason why this should occur.

Coventry sounded more optimistic about the competitive environment in Western Pennsylvania than it has in some time, a sharp contrast to Aetna's commentary on other markets. It's easy to make generalizations, but Blue Cross pricing strategies are different in every market.

Firm notes they would have liked to see CVH raise full-year guidance more, since 2Q operating metrics were so strong, but they recognize the company's history of conservative forecasts, and its desire for a few more months of data on the new PDP program, and the sustainability of lower cost trends. Reits Sector Outperformer and $67 tgt.

Notablecalls: Mixed feelings about this one. I think it may bounce but the move won't be big.

Calls of Note Part 4

- Goldman is adding Jabil Circuit (NYSE:JBL) to the Americas Conviction Buy List with a 6-month $28 price target. Jabil has had a strong track record of positive earnings revisions and execution. However shares have come under pressure due to "3 strikes": 1) a new restructuring program, 2) execution missteps, and 3) an ESO backdating investigation. Firm believes that shares of JBL have pulled back to levels that make it attractive if the company can get earnings back on track - they believe it can. Firm's $28 target price implies 21% upside from current levels. FY4Q2006 (August) earnings report in late September and a traditional 4Q rally should serve as catalysts to move shares higher.

Jabil will report FY4Q06 results on September 26, 2006. Management has set expectations that its 3 execution problems in FY3Q06 would continue through the end of fiscal 2006 with improvement in fiscal 2007. Goldman believes that the company will positively surprise on these operational issues potentially leading to EPS upside relative to guidance, consensus and estimates. Second, Jabil has rallied in/around the fourth calendar quarter 8 out of the last 10 years, outperforming the S&P500 during all of those rallies.

Notablecalls: I would not be surprised to see a bounce in JBL.

Calls of Note Part 3

- Soleil's Peter C. Friedland is out with a good call on Garmin (NASDAQ:GRMN) saying that despite disappointing Q2 results thus far from the PND group " TOM2, SIRF, NVT and TA6 " they believe these stocks have been affected by issues that shouldn't impact Garmin. In fact, they believe the key datapoint from these reports for Garmin is that NAVTEQ reported 40% sequential growth in Q2 PND unit volume.

Given that Garmin is a key NAVTEQ PND customer, and that the firm believes Garmin has held its own in market share during the quarter, they believe it is reasonable to assume that Garmin posted at least 40% sequential PND unit growth, which is well above the 20% in Soleil's model. Therefore, assuming the stronger PND unit volume, and factoring in a modest haircut to their numbers based on recent weakness in the overall recreational marine market, they believe Garmin should post Q2 revenue of at least $400 million and EPS of $1.00-$1.05, well above the consensus $378 million and $0.94.

Notablecalls: I'm not sure Soleil has the following to generate a meaningful bounce but I think the note provides a roadmap of what kind of number GRMN is expected to post.

Calls of Note Part 2

Bear Stearns comments on Whole Foods (NASDAQ:WFMI) saying they believe consensus EPS for 2007 remains at risk. By their estimates, the 2007 EPS of $1.66 ($0.06 above our est.) implies WFMI will realize margin expansion despite a planned acceleration in store openings combined with the prospect of moderating comp. Firm's $1.60 est assumes 20% sales growth (on 9.2% comp store sales) and a flat operating margin of 5.6%. 3Q06 $0.34 EPS estimate and 11.1% comp are in line with consensus.

Believes WFMI has benefited from strong macro factors that lessened price consciousness and increased aspirational spending. However, compelling evidence suggests all segments of consumer spectrum are moderating spending. Firm remains most concerned over the broader implications of a decelerating Target comp and the sustained traffic erosion occurring at most casual diners, which bodes poorly for WFMI customer base, in their opinion.

The premium valuation exposes stock price to further pressure as sales and earnings growth appears poised to decelerate. Current valuation ignores several risks (moderating mid- to high-end consumer, likelihood of a comp deceleration, gross margin and competitive pressures.) Finally, dramatic growth in foodservice has changed underlying business model, increasing the exposure to cyclical factors while adding operational complexity. Maintains Underperform.

Notablecalls: I like this call. I believe WFMI will end up lower today.

Calls of Note Part 1

- Goldman Sachs notes Oracle CEO Larry Ellison continues to signal his intention to compete against Red Hat (NASDAQ:RHAT), most recently in a Forbes interview noting that Oracle can offer support for Red Hat Linux and has rights to redistribute the product. Firm continues to believe Oracle will soon announce intentions to redistribute a Red Hat compatible product, possibly for free and also offer support services for this product at a fraction of the price of Red Hat.

Firm would avoid Red Hat's stock until Oracle announces its Linux strategy. Delivering a Red Hat compatible Linux distribution makes Oracle even more of a competitive threat than delivering comparable technology or a different ("non-standard") distribution as Novell has done. Red Hat Enterprise Linux has over 80% market share. They believe Oracle is motivated to preempt Red Hat's progression up the infrastructure stack as a database and middleware vendor by disrupting Red Hat's business model but not harming the Red Hat Linux distribution which Oracle needs to be successful to counter Microsoft.

Notes their negative view on Red Hat seems to be a minority view among sell side analysts. Feel confident the bulls will be proven to have been overly bullish and to have disregarded the risks Oracle presents in this market. Maintains Sell.

Notablecalls: Mixed feelings about this one. On one hand its not news. On the other hand
Goldman has a large customer base and RHAT trades 55x 06 EPS and 40x 07 EPS. I want to see some weakness in RHAT before taking action. If this one starts rolling over it will be ugly.

- Bear Stearns think recent strong Q2 reports by Standard & Poor's and Fitch bode well for Moody's Corp (NYSE:MCO). In Q2, S&P posted 19% revenue growth (organic) while Fitch rose 16%. Both companies exhibited robust top-line growth amid fears of a slowdown in debt issuance. Moody's reports Q2,06 results this Wednesday, August 2.

Firm expects Moody's to benefit from the same factors cited by its competitors---solid structured finance growth (with CDOs up big---offsetting a more-subdued RMBS performance) and sharp gains in the investment grade and HY categories. However, keep in mind that the top-line comparison for Moody's (Q2,05: +25%) is more difficult than those for S&P (+14%) or Fitch (+21%). They lifting their Q2 EPS estimate by $0.03 to $0.58, and 2006 estimate to $2.11. This more than reverses $0.02 estimate cut following MCO's Investor Day in early-June.

Notes they realize that their estimate tweaks are a bit late as MCO shares are up over 10% in the past week. They also think a fresh round of regulatory rumbling this week could take the wind out of MCO's and MHP's respective sails. Indications are that the Senate Banking Committee could act on a ratings agency bill this Wednesday. Maintains Peer Perform.

Notablecalls: See that 200 day moving average around $57 level? Thats where I expect the shares to stall. Vertical moves like that (almost) never hold.

Notablecalls - Paperstand

According to The Wall Street Journal, Verizon Wireless is releasing a cellphone that doubles as a music player and has a design similar to the popular iPod. The phone, dubbed the "Chocolate," is another effort by wireless carriers to encourage consumers to use mobile handsets as MP3 players. All the major US cellular carriers have launched services that let consumers download music and ring tones to their phones or transfer them from their PCs. But cellphone co's now are edging further into the turf of music players by designing handsets with prominent playback buttons and more storage space for songs. The Verizon Wireless handset, made by LG Electronics, will be in stores Aug. 7 and will be exclusive to the carrier. "Verizon's model seems to be going after Apple and iTunes more than anything else we've seen," says Linda Barrabee, of Yankee Group.

The WSJ reports that Northrop Grumman (NOC) has put its navigation-systems division on the block. The unit could fetch between $800m and $1bn. Last week, Raytheon (RTN) said it hired Credit Suisse to explore a sale or spinoff of its civilian-airplane division.

The WSJ's "Tracking the Numbers" column discusses Nortel (NT), saying that the co has billions of dollars in valuable credits that could aid its financial recovery. Trouble is, there is disagreement over whether those credits, the co's largest asset, should still be on its balance sheet. A recent report from research firm Glass, Lewis & Co. says that co's string of losses suggests it might need to write down the value of tax credits earned in past years that have been held over to offset tax liabilities on future earnings. The co hasn't done so, citing the likelihood of near-term profits. Such a write-down could wipe out Nortel's shareholder equity, or the total of its assets less its liabilities. Nortel expects higher rev this year and is taking a series of steps intended to bring its operations back to profitability. But any improvement would follow a series of losses in recent years, and those losses are an important factor in determining how to book the tax credits, Glass Lewis and other accounting observers say.

Barron's Online reports that a longtime Caterpillat (CAT) director, Juan Gallardo, doled out $7.7m to buy 110K shares in the open-mkt Thursday boosting his direct holdings to 204K shares. The dollar value of Gallardo's purchase was the most any Caterpillar insider spent to acquire shares at one time. "This is a big standout," says Mark LoPresti, of Thomson Financial, because Gallardo has tended to make small transactions of 7K shares or less at a time. His only other large insider transaction took place in Oct'00, which preceded a 34% gain 6 months thereafter.

Colour on BMY's Plavix news

Several firms are commenting on Bristol-Myers Squibb (NYSE:BMY) as after the market close on Friday, Maryland Assistant Attorney General Meredyth Andrus announced on behalf of the state attorneys general with whom Bristol had entered into a consent order in 2003, that the AGs "object to and will not approve" the proposed settlement of the Plavix patent litigation. The state AGs did not disclose the basis for their rejection.

* JP Morgan notes the companies - Bristol, sanofi and Apotex - can either return to court to litigate the patent dispute, or they can draft a new proposed settlement agreement for review by the FTC and the state AGs. It would be a violation of both the FTC and state consent orders for Bristol to go forward with a settlement without approval of the antitrust enforcement authorities, and the company would undoubtedly face severe legal penalties were they to attempt such a maneuver.

The likelihood of the FTC and state AGs approving a settlement agreement containing more than a nominal ($2 million) reverse payment appears very low.

If the parties decide not to continue negotiating a settlement, two big questions arise: 1) when in Judge Stein's apparently now very busy calendar will the trial be re-docketed, and 2) will Apotex launch at risk? Firm understands that the schedule of Judge Stein, to whom the Plavix case was assigned, has become fairly tight through the fall, it could easily be six months to a year before a decision is available, followed by the inevitable appeal. The significance of this timing could be lowered considerably if Apotex decides to launch generic clopidogrel at risk. The company apparently began producing an inventory of generic product and was approaching distributors about carrying it when the proposed settlement was announced. Whether this was a bluff remains to be seen.

Launching at risk would be a "bet-the-company" endeavor for Apotex, but the firm has a reputation for aggressiveness. Such a move would gut Bristol's Plavix revenues, and there would be little the company could do about it in the short term.

* Morgan Stanley (who was one of the few to voice skepticism on the proposed settlement early on) notes they believe that the most viable option for BMY is to abandon the settlement and to instead go back to court to try the Plavix case. Given this scenario, a trial date would still need to be set which may take up to a year. Assuming BMY loses the case and taking into consideration the time involved in completing such trials, the earliest we could see a generic Plavix would be 2009. This is 2 years before the Plavix patent expires and according to firm'scalculations, the resulting impact from an NPV basis would be around $1.00- $1.25, corresponding to a share value between $22-$24.

* Banc of America notes that although they view an 'at risk' launch as a low probability event, particularly ahead of a district court decision, they would note that this scenario would be downside to their estimates. Firm estimates that the NPV different between a Plavix patent win or loss as less than $1, assuming no generic competition until the completion of the appellate process. However, with US Plavix sales representing over 20% of BMY's current EPS, NT generic competition would represent $1-2 of downside to firm's $24 price target.

Believes Bristol has pushed out potential generic competition on Plavix by roughly one year through this settlement process. They are maintaining their $24 price target. Rating stays at Neutral.

Notablecalls: I expect BMY to get hit following the news. Considering the pressure the stock experienced following the DOJ news last week I think the downside is already somewhat muted. I'd be an opportunistic buyer around $22.5 level. Note that most firms see $1-$2 risk to their tgts. Just a bounce play. BMY's becoming a mess. Don't want to overstay my welcome.

Notablecalls - Barron's Summary

Barron's cover story discusses China economic in general. No stocks mentioned.

Barron's highlights Epoch Investment Partners (EPHC), which assets under mgmt have returned 17.2% after fees for the past 3 years, vs 11.2% for the S&P's 500. CEO says that if they can continue to perform for clients as they build the firm out, there is no reason why the firm can't become a $10-12bn entity in a 3-5 year period. CEO's best picks include DVA, OMM, CMCSK, BG and AMD.

According to the Barron's Coach (COH) is down sharply, to 27-28 this year, on concerns about consumer spending. The near-term downside is about 10%, but the upside could be more than 25% in a year.

Barron's discusses El Paso (EP), saying that the stock has rebounded to 15.60, from 3.45, but the gains are far from over. The stock is likely to trade up to 20, based on earnings growth and the value of the co's reserves.

According to the Barron's, Tetra Tech (TTEK) stock's recent dip looks like a buying opportunity. The shares could climb by about one-third over the next year, to 20, as demand stays strong and profit margins improve.

"Sizing Up Small Caps" column discusses Range Resources (RRC), which is extracting natural gas from unconventional sources like tight sands, coal beds and shale. Analysts peg Range's '06 cash flow at $3.50 a share and over $4.60 for '07. Based on those numbers, shares are trading somewhat below those of the co's peers, while Peter Vig, of RoundRock Capital, figures they deserve a premium. In 18 mo's, he expects the stock to trade at $40. Mr Vig also likes Denbury Resources (DNR), exploration and production co heavily weighted toward oil. The consensus puts Denbury's cash flow at $3.50 a share this year and around $4 next. So at 32 and change, the stock is going for 9.3x this year's estimate and 8.2x next, a fair notch above its peers. But Denbury, pure and simple, is unique. The co lays claim to the biggest reserves of carbon dioxide for tertiary oil recovery east of the Mississippi. In fact, from East Texas to Florida, Denbury's reserves are the only significant known natural source of CO2. Mr. Vig sees the stock at $45 in 12 mo.

Notablecalls: Peter Vig highlighted EGN in a last week Barron's. EGN moved from 38 to 42 in a week. Expect to see similar moves in RRC and DNR.

Technology Trader column discusses semi sector, saying that the PC semiconductor business is getting competitive in ways that may be better for consumers than investors. Intel (INTC) and AMD (AMD) are battling brilliantly on price and technology, but growth in their PC end-mkt has decelerated. So even though Intel may look like a cheap stock, more diversified semi issues look like better bets these days. Instead of Intel, investors might instead take a gander at microcontroller maker Microchip (MCHP); the analog semiconductor vendors Linear Technology (LLCT) and Analog Devices (ADI); and the wireless chip giant Texas Instruments (TXN). "I don't think it really makes sense to own Intel or AMD when there's a price war," says Adam Parker, of Sanford C. Bernstein.

Friday, July 28, 2006

Color on quarter: RealNetworks (RNWK)

RealNetworks (NASDAQ:RNWK) will be on the casualty list today as the co failed to meet analyst estimates:

* Goldman is lowering their 6-month price target to $7.50 ($8.00) due to their 35% and 20% reductions in 2006E and 2007E EBITDA given a 42% miss in 2Q2006 and outlook for weaker than expected profitability for the full year due to greater operating expenses as RNWK invests to compete in a highly competitive market. Valuation is extended as shares trade well above firm's price target and at 27x 2007E EBITDA, a 52% premium even to Google at 18x despite Google's 20% -25% long-term growth vs. 15% for RNWK. Lower 2006 revenue guidance to $370mn from $372.5mn implies a $3.5mn reduction in 2H2006 top line expectations. The results and the outlook result in lower EBITDA, creating increased uncertainty around profitability in 2007.

Goldman reiterates their Sell rating as they expect 2Q2006 results and an ~35% reduction in 2006E EBITDA to put downward pressure on RNWK shares given results were below expectations and a lowered outlook only makes an expensive stock, on an absolute and relative basis, look more expensive. Shares are trading almost 200% above the sector on 2007E multiples, which the firm believes is unwarranted given declining EBITDA vs. the sector's 25%-plus EBITDA growth. Strong growth in games could fuel investor optimism in the potential of this segment; however, they continue to believe that competition is only likely to heighten in this area and growth could diminish without acquisitions.

* Stifel notes the stock will likely pull back, particularly if market refocuses on valuation metrics outside of EV/revenues: RNWK has risen from $8 to ~$10 this year on very little news, perhaps a result of the company's buyback or investor optimism that RNWK will use its balance sheet to become the next JAMDAT, Akamai, or a company with hidden patent value. Given an extremely high valuation on traditional metrics (104x 2007 cash adjusted EPS excl. MSFT proceeds and 38x 2007E EBITDA) in combination with potentially aggressive guidance, they believe the shares are subject to a pullback. RNWK trades at 2.3x EV/revenues, the firm believes somewhat reasonable based on a sum-of-the-parts. Maintains Hold.

* Oppenheimer notes the company added roughly 50,000 music subscribers in 2Q vs. an average of 150,000 new subscribers for the past four quarters (total paid subscriber count was flat QoQ at 2.4mm). Music subscribers increased 41% YoY, while music revenues grew only 21%, indicating lower music segment ARPU. Firm believes the slowdown may indicate a lasting market preference for end-to-end systems such as Apple's iPod. Microsoft recently announced it is launching a similar end-to-end service in late 2H.

Games segment revenues were up 55% YoY, though likely 23% YoY organically. Firm believes the company is likely to see continued success in monetizing its games franchise through mobile and retail channels, as well as through the inclusion of in-game advertising.

The company bought back 2.1mm shares at an average price of $9.43. Believes the company has roughly $80mm outstanding in its share buyback authorization. Reits Neutral rating.

Notablecalls: I expect RNWK to go sub-$9 today. The valuation is sky high and without any sub growth it can only mean lower price for the stock. I must note that I did like the growth number the co put out for their Games segment. I suspect this one has better margins than the Music one. But that won't have any real impact in the s-t.

CIBC defending Focus Media (FMCN)

- CIBC is defending Focus Media (NASDAQ:FMCN) noting that yesterday, FMCN shares declined 9% following a competitor s informal comments concerning the high-end of 07 Street estimates being potentially too high. Because this followed a company visit in China, and these comments were not written in a formal note, CIBC thinks this added to the confusion. They think any estimate concerns are overblown and would use weakness as a buying opportunity ahead of the quarter.

Notes they have been aware that one of the prominent analysts covering the stock based his Street-high revenue and EPS estimates on aggressive assumptions of a currency revaluation in 07. Excluding the RMB appreciation factor, they think these estimates could be in line with the rest of the Street.

Channel checks from our recent China trip suggest advertising growth remains robust, and Focus networks are becoming widely accepted as one of the strongest media formats for brand advertisers and media buyers. Meetings with top ad agencies buyers suggest that Focus continues to gain market share among budgets, and is only now becoming more mainstream, suggesting that pricing should remain strong.

Firm also believes that weakness in shares, down 21% yesterday, also had an indirect impact. BIDU sold off after reporting 2Q revenue that did not exceed Street estimates, even though revenues increased 180% y/y, and EPS exceeded on better margins. However, that stock had been trading at a 67X PE vs. 27X for FMCN, based on 07 estimates. Moreover, these two companies businesses are hardly related (search vs. outdoor advertising), while a significant portion of BIDU's revenue comes from local businesses, whereas FMCN's revenues are almost all national/multinational.

FMCN represents CIBC's best defensive name if the US economy were to see slower economic growth. Trading at 25x 07 EPS estimate, with 90% EPS growth forecast this year, and 70% growth next year, they believe investors are not fully "sold" on the Focus story and currently doubt existing Street estimates. Reits Sector Outperformer rating. Tgt remains at $74.

Notablecalls: One to watch today for a bounce.

Color on quarter: Digital River (DRIV)

Couple of firms are out positive on Digital River (NASDAQ:DRIV) following results and guidance announced last night:

* Piper Jaffray notes Digital River had solid Q2 results highlighted by 39% revenue growth. DRIV continues to experience strong revenue growth driven by broadband adoption and increasing migration of software publisher online. The focus of the call, however, was on DRIV's comments that it has secured "significant incremental business." Firm believes one of these clients is Microsoft (DRIV indicated one partner could be a 10% partner in 2007). While DRIV will spend incremental dollars to ramp up these new major relationships in 2006, they have raised their 2007 revenue growth assumptions and expect solid operating leverage in 2007, and believe their estimates will likely prove conservative. Firm believes DRIV remains one of the most attractive stocks in their universe and believes that increased visibility into the new relationships and the diversification of DRIV's business model away from Symantec should provide for multiple expansion. Reiterates Outperform rating and $56 price target (14x 2007 EBITDA).

* Deutsche Bank says they maintain their Buy rating on shares of DRIV post in-line 2Q results. Firm thinks there could be significant client wins ahead as infrastructure and integration has already begun ahead of the launch . There is still plenty of existing business to be had with existing customers as well (Symantec). Shares are off 5% in aftermarket trading to $38, with concerns about 3Q guidance (lower tax rate), which they believe is unwarranted. Firm remains buyers as shares are currently trading at 20x 2007E EPS, vs. the e-commerce group trading at 23x 2007E EPS.

While guidance nudged up a bit again ($305mn vs. firm's $301mn estimate for 2006), they do think the major opportunity lies in new customer wins and international expansion at Digital River. On the 2006 EPS front, the company guided to $1.74, vs. our $1.73 estimate previously. As such, firm's investment thesis remains in tact, they continue to believe that the potential for e-commerce outsourcing deals (both new and existing), in addition to continued e-commerce/broadband penetration, favors Digital River over the next several years.

For the first time, the company talked about new significant business they have won or high expectation to win, both on its release and the conference call. While the firm believes in the short term (next two quarters) the company will likely incur higher operating expenses to build out the core infrastructure to support more business, these new clients should provide additional diversification (outside of AV) and further validates the value proposition at Digital River. Price tgt remains at $58.

Notablecalls: I think the 2pt sell-off we saw in DRIV in after mkt trading was just plain wrong. I expect this one to be squeezed higher today

Notablecalls - Paperstand

The Wall Street Journals "Heard on the Street" column discusses Chico's FAS (CHS), saying that the co has been so successful that there may not be many new customers left to attract. After becoming one of the stock mkt's top performers over the past decade, Chico's shares have fallen more than 50% since reaching a high Feb. Street's sudden snub has irked Chico's CFO Charlie Kleman, who assailed critics in an investor conference this month. "Certainly the Chico's brand is more mature than it was 3-5 years ago, but we do not believe it is by any means mature," he fumed. The reversal in Chico's fortune revolves around the question of whether the co can sustain its success as the expansion of its original brand slows while the co develops 3 other brands it has created or acquired in the past 3 years. "We continue to view Chico's as a core retail holding and recommend investors capitalize on the recent pullback," wrote Lauren Cooks Levitan, of Cowen, in a research note to investors this month.

The WSJ's "Tracking the Numbers" column discusses General Motors (GM), which has been a popular trade for short sellers. At the beginning of this year, 17% of GM's outstanding shares were sold short, up from 10% five months earlier. Large household-name co's rarely see the short-interest percentage in their stocks climb above single digits, but given GM's woes, the shorts felt they had a sure thing. That sure thing has turned into a pileup of wrecked trades: GM shares are up 60% over the past few months, making it the top performer among the component co's of an otherwise sideways-moving DJIA. A rally in a shorted stock hurts the short seller, who sometimes must pay higher fees on the borrowed stock or, in a worst-case scenario, buy the stock back at its higher price and close out the trade, registering a loss. "It was a very popular short at the beginning of the year, but since April, it's been working against you," says Joseph Amaturo, of Calyon. "There's a fair amount of pain." Adds a hedge-fund manager who has lost money betting against GM: "Earlier this year, you couldn't go to a dinner without someone pitching you an idea on shorting GM...but there's been a giant sucking sound of hedge funds losing money" in the past few months.

Barron's Online discusses Electronic Arts (ERTS), whose stock is up 15% since Jun 26. Some believe that this is a signal some believe the worst is over. Still, substantial uncertainties remain in this videogame cycle. Will Sony (SNE) ship enough units of its PlayStation 3 machine this holiday season in the US? Will gamers shell out as much as $600 for the thing? At the same time, development costs are going up, up, up. EA's R&D is expected to rise 20% this year while sales decline slightly. With an uncertain marketplace and escalating costs, it'll be no slam-dunk for EA to hit a home run with each game, and do it profitably. For that reason, it may make more sense to buy call options to exploit potential upside to EA's August earnings report, rather than buying the stock outright right now. "The transition [to new consoles] is always more painful than you thought it would be," says Mike Sansoterra, a technology analyst with Principal Global Investors. In addition, he says, "EA still has to show they can control costs," which is difficult when, "this is becoming more like the movie business, where you have to have a blockbuster with each title."

The NY Post has learned that while Time Warner (TWX) is set to unveil the details on a plan to make many of the features at America Online free, behind the scenes the media giant is weighing much bolder moves to transform the troubled Internet unit. In recent weeks the co has once again approached major tech and media co's to discuss possible partnerships, and internally the co has been weighing a plan to spin off a portion of AOL, perhaps as much as 20%, to public shareholders. The plan to make AOL's e-mail and Web services available free to high-speed Internet users was presented to Time Warner's board yesterday, and will be unveiled publicly on Aug. 2.

Thursday, July 27, 2006

Color on quarter: Mattson Tech (MTSN)

- While it seems that most investors and analysts were waiting for Mattson Tech (NASDAQ:MTSN) to report a strong qtr and upside guidance it seems all they got was yet another disappointment. The co pushed out gross margin recovery by another 6 months. I don't see any downgrades but several firms are cutting their tgts.

* Deutsche Bank notes Mattson delivered strong 2Q06 orders and revenue, but disappointed on GM, and 3Q06 guidance followed the same trend. Further penetration of Japan and a resurgence of older 300mm tool demand depressed GM, extending the time to the 46% GM goal by two quarters (to 2Q07).

Firm maintains their Buy rating on MTSN, but cuts their price target to $10, or ~19x C2007 EPS estimate of $0.51 (excluding ~$0.03 in stock option expenses).

* Citigroup notes that margins continue to disappoint with targets pushed out another six months with competitive pricing pressure (they believe) more of a culprit than MTSN suggesting; working capital mgmt remains disappointing.

Product mgns have not improved in ~2 yrs despite better product mix + move to flexible outsourced model - these executional issues obscure share gains with new Suprema tool. Firm notes that share gains took them off Sell, but execution must improve dramatically to take them off Hold. Ests tweaked, tgt $10 to $9 - Reit Hold.

* Stifel notes that while they suspected that there may be some downside risk to their gross margins forecast, they were disappointed to see the company's final 40.5% result.
The weak margins can be attributable to two main reasons, 1) a pickup in some of Mattson's older but lower margin products in the quarter (which they had suspected), and 2) SAB101 revenue recognition policies, where deferrals could have a near term negative impact to margins (which they did not anticipate).

Unfortunately, they firm believes that these pressures will continue at least through the September quarter, and possibly in the December quarter as well. With all these aspects in mind, we are not changing their revenue forecasts for 2006 or 2007, but are lowering EPS estimates due to the lower margin profile.

Given the current stock price, they see limited downside ($7) risk, and hence will maintain Buy rating. Along with our EPS reduction, they are lowering price target to $12 from $14, which reflects approximately 3.0x book value, and is in line with firm's more cautious outlook for the industry.

While they still believe Mattson can be a long-term outperformer (which it has shown on the market share side), they believe it needs to bolster its margin profile before they can apply a premium multiple to the name.

Notablecalls: I fully expect MTSN to trade down today. Maybe as much as a full point.

Color on quarter: Business Objects (BOBJ)

- The analyst community is surprised following stronger than expected results and guidance issued by Business Objects (NASDAQ:BOBJ) last night. Note that 20 days ago the co gave a pretty dismal profit warning for the qtr, causing the stock to sell off badly. We have at least one firm upgrading the shares this morning.

* CSFB is out upgrading their rating to Outperform from Neutral.

* Merrill Lynch notes that although still a solid miss, Business Objects' 2Q results came in significantly better than preannounced results. Management lowered its 2006 outlook to reflect the weaker 2Q but the above revised consensus expectations appear reasonable. Europe was down 8% Y/Y and represented the most significant source of weakness, while APAC turned in flat Q/Q results showing signs of stability. Though the company closed just 4 deals over $1mn, the 113 deals over $100K compared favorably to 96 in 2Q06. Americas delivered strong results across all product segments.

Firm is raising their forecasts modestly to adjust for 2Q results and improving operating efficiencies. For 2006 they are raising revenues to $1,21mn from $1.20bn and raising Pro Forma EPADR (ex option expense) to $1.51 from $1.40. For 2007 trimming sales to $1.32bn from $1.43bn and raising EPADR by $0.05 to $1.65. Reiterates Buy opinion and $32 price objective.

* Goldman Sachs thinks investors are likely to be somewhat relieved Business Objects' reported 2Q results were not as ominous as they first appeared in the negative preannouncement July 6 (pro forma EPS actually in management's initial guidance range). However, in firm's view, management's more optimistic outlook for the remainder of the year assumes that the problems executing in EMEA and closing large transactions were relatively short-term in nature and can be fixed quickly. The company is reassessing its forecasting methods and close rate assumptions and believes new incentives can spur more rapid upgrades to XI release 2 in the installed base. While they are encouraged, efforts to improve execution could take a few quarters, and they continue to believe that the BI market is becoming more competitive, particularly as Microsoft and SAP make more aggressive moves with their own attractively priced bundled capabilities. 3Q is seasonally slow and improvement may be more weighted to 4Q. Ups their price tgt to $26 from $24. Maintains Neutral.

* Banc of America remains buyers of the stock under the premise that the major issues in Europe, including potentially higher sales org attrition and slower migration spending for the new XI Release 2 products, can be overcome by the end of the year. Maintains Buy and $30 tgt.

Notablecalls: My jaw almost dropped when I first saw the number BOBJ had put out. I bet that Citi analyst that downgraded the shares yesterdat morning had a restless night. I suspect the shares will trade higher today but will have difficult time surpassing the levels reached in after hrs trading. But surely the bottom is in for this one. Going higher in the coming weeks.

Goldman comments on (BIDU)

- Goldman Sachs comments on (NASDAQ:BIDU) noting the company reported 2Q2006 gross revenue of 192mn RMB (up 175% yoy), which was slightly below both firm's 193mn RMB forecast and the high end of guidance at 193mn RMB. Exceptional growth was driven by 69% yoy growth in new advertisers with spending per advertiser up 30% yoy. Despite robust growth and significant upside in EBITDA margins, they believe results are negative for the stock given that investors have set an aggressive bar for Baidu to exceed in order to justify the stock's current valuation, which is at a 100%-plus premium to both premier Chinese and US Internet companies including Google, a fast-growing US company.

Firm thinks the shares will likely be under pressure given that in-line revenue should temper investor expectations, combined with a pending lock-up of 16mn shares (10 day average is ~3.3mn) on 8/13/2006. A 100%+ premium EV/EBITDA multiple to Google (especially given the typical Chinese company discount) generally implies that investors need to see revenue outperformance to drive the shares higher. A significant stock pullback could create a more opportunistic entry point. Firm is raising their top and bottom-line expectations, which result in a slightly higher 6-month price target of $70 vs. $67 previously. Significant margin expansion from current levels may be less likely given the investment opportunities, capex ramp, and increased competition.

Based on an after-market close of $78.50, BIDU shares have ~10% downside and continue to trade at a significant premium to its US and Chinese peers at a 2007E P/E and EV/EBITDA of 49X and 37X vs. the US medians at 27X and 11X and the Chinese medians at 20X and 14X, respectively.

Notablecalls: Notice how it bounced off the 200 day moving average in after hrs trading. This is the level it needs to hold. Bet Stevie went home unhappy but I suspect he has bigger plans with BIDU. Expect to see some takeover chatter develop in the coming days/weeks.

Notablecalls - Paperstand

According to The Wall Street Journal, 5 major telecom-equipment vendors are set to announce today major changes to their next-generation network technology to help telecom operators accelerate their introduction of features that combine phone, television and Internet services. The co's, Cisco (CSCO), Lucent (LU), Motorola (MOT), Nortel (NT) and Qualcomm (QCOM), have been working for the past year to revise their systems to meet Verizon Wireless's requirements. But they are planning to sell the new technology to other carriers as well. Carriers rolling out new multimedia features are expected to spend billions of dollars in coming years on new Internet-based technology, known as IMS, for Internet Protocol Multimedia Subsystem.

The WSJ's "Heard on the Street" column discusses favorably Automatic Data Processing (ADP), saying that it has a huge and growing stash of cash that could keep investors happy, and a business model that could help it beat other stocks if interest rates keep rising. "This stock is cheap here," says Brandt Sakakeeny, an analyst with Deutsche Bank. Mr. Sakakeeny rates the stock a Buy. The "reputational black eye" the co suffered recently might be why it has underperformed in the past 2 weeks, says Gary Bisbee, an analyst with Lehman Brothers who gives the stock an Overweight rating.

Barron's Online discusses Borders Group (BGP), whose shares are down 15% YTD. A bottom-feeding investor might see opportunity in these beaten-down shares. And Borders is taking steps to boost earnings and mollify investors. The co is remodeling its nearly 480 domestic superstores, closing or rebranding its underperforming Waldenbooks chain, and luring customers with its Borders Rewards loyalty program. But analysts say that despite the co's best efforts, a downbeat book sector coupled with an overall weak retail environment will continue to damp Borders' earnings as weak wage growth and high gasoline prices put pressure on bookworms. Deutsche Bank analyst Dave Weiner says, "In a nutshell, I like what [Borders] is doing with the remodels, but I don't think investors are going to reward those anytime soon given the headwinds [Borders] is fighting."

Wednesday, July 26, 2006

Interesting Call of The Day - Digital Insight (DGIN)

- Stephens is out defending Digital Insight (NASDAQ:DGIN) noting the stock is off roughly 25% today on three items--slowing billpay trends, the defection of some growth shareholders, and a resellers' comments this morning that it may move business from DGIN to in-house products.

Firm is upgrading DGIN to Overweight from Equal-Weight based on one simple theory-the news flow on this name the last 24 hours should not dictate a 25% share price decline, and they expect future news flow to lead to a $30+ stock price. DGIN has a 90+% recurring revenue model, billpay trends have rebounded to past levels thus far in July, and on the reseller agreement with FIS going away, they have in-depth knowledge of this contract and believe FIS makes too much money on the agreement to cancel it.

Furthermore, the contracts between DGIN and FIS mean FIS can't just pull the business. Firm's $36 target is based on a multiple of 28x our FY07 pro forma EPS estimate (DGIN has traded at a forward P/E multiple range of 21x-34x historically). One can argue this assumed multiple is high in light of the peer average of 23x, but DGIN's cash balance is relatively higher (roughly $3/share) and they see more upside to Digital's numbers than its peers.

Notablecalls: While I expected DGIN to trade down today, the 25% sell-off comes to me as a surprise. Outsourced online banking apps mkt isn't going away any time soon.

Color on quarter: (AMZN)

- Several firms commenting AMZN results with the emphasis on disappointing profitability:

* Prudential notes that profit margins deteriorated precipitously in the quarter, due to increased spending on technology, free shipping, a product mix shift, as well as $20 million of costs associated with the termination of the contract. The company raised its FY'06 revenue guidance, but lowered its operating income guidance by $80 million. Firm is taking its numbers down and lowering price tgt to $25 from $30. Reiterates Underweight.

* Goldman Sachs notes that Amazon reduced its operating profit guidance by 15% including Toys R Us and by ~7% excluding Toys R Us, which appears to be a departure from a return to double-digit incremental operating margin. This apparent increased investment vs. the prior plan likely eliminates what could have developed into a potentially more constructive view if the shares reached the low $30s. As such, our thesis remains relatively unchanged. They believe Amazon valuation remains ahead of its fundamentals, while the company needs to resolve several company-specific issues (i.e., its proprietary toy offering as well as its digital strategy) and simultaneously show stronger incremental margins before we can consider becoming more positive on the stock.

* Citigroup says they are more negative. Revenue and unit trends are robust, but the growth is coming at increased cost. Excl. TRUS impact, N. America gross margin down 60 bps Y/Y and International gross margin down 130 bps Y/Y. Increasingly aggressive pricing and shipping promotions are the culprits. Still no clear signs of ROI on all that Tech & Content spend.

Notablecalls: Anyone still doubting that AMZN has became just an usual retailer instead of high-growth internet company? The question is, when will the valuation reflect this. Todays sharp decline will surely take it closer there.

Color on quarter: Digital Insight (DGIN)

- Digital Insight (NASDAQ:DGIN) will be on the casualty list today as the company last night failed to beat & raise. Also, subs number was way below analyst ests.

* JP Morgan notes DGIN mgmt maintained their FY06 $243-245M and $1.05-1.07 proforma guidance, even with rev upside in 2Q. 3Q guidance of $61-61.5M and $0.26-0.27 is below the Street consensus of $62/$0.27 EPS, likely pressuring DGIN share price today.

DGIN added just 66K bill pay subs in the qtr, well below firm's 125K estimate, and couldn't explain the variance. DGIN monthly rev per customer of $2.33 was below estimates for $2.35 as bill pay shortfall could not offset ongoing online banking pricing pressure. Banking sub adds of 211K were above 190K est.

Although DGIN continues to execute well, uncontrollable factors such as bank customer MandA can reduce revenue growth via lost subscribers. Firm is more perplexed by the bill pay customer shortfall, which may be a one quarter anomaly, but with shares richly priced at 30X FY06 EPS, we likely see the stock decline today. Maintains Neutral.

* Merrill Lynch notes that following DGIN's 2Q06 results and conference call, they think investors will focus on what looks like a slowdown in online bill payment adoption. DGIN only added 66k new online bill payment uses in 2Q vs. an avg. of 125k over the prior three qtrs. Competitor Online Resources (ORCC) also experienced a slowdown while bill payment stats at large banks were generally solid in the qtr.

At this point, the firm doesn't have a great explanation for the slowdown at DGIN and ORCC. Perhaps it's an anomaly; maybe large banks are taking customers from small banks; maybe biller direct is gaining share vs. bank centric models. Nevertheless, they think the slowdown along with mixed financial results will keep DGIN shares range bound in the near-term, especially considering the stock's premium multiple.

* D.A. Davidson notes that sisappointingly, DGIN lost six Internet banking contracts, net, in the quarter, (15 were lost to merger activity). 211,000 new IB users adds was mediocre, while 66,000 new bill pay adds was poor. Clearly client losses account for most of the shortfall, however, seasonality appears to be playing a more substantial role.

Expects investors in the near term will focus on the negatives; lending, bill pay growth, and bank M&A. However, DGIN is sheltered from significant impact given its large client base, recurring revenue, and newer product partnership strategy. Firm would not be sellers into today's likely weakness.

Maintains NEUTRAL rating, but adjusting price target from $37 to $35, which represents 27x 2007 EPS estimate (or 25x excluding cash) and an EV/2007 EBITDA multiple of 13x.

Notablecalls: I would not be surprised to see DGIN stock down 10% today. With this rich valuation the co will have to do better than just half analyst est of sub adds. But don't get me wrong, I like the co. I just happen to think the stock is expensive.

Color on quarter: Cymer (CYMI)

- Several firms are commenting on Cymer (NASDAQ:CYMI) following disappointing results and guidance announced last night. Surprisingly, we even have one firm upgrading the shares of heels of the news.

* Banc of America upgrades the shares to Buy from Neutral noting they had beencautious on the stock due to valuation. With the stock down over 25% since May (vs. -4% for the S&P500), they now think it's a good time to accumulate shares. Lithography remains firm's favorite segment as they believe adoption of new set of technologies (ArF/immersion) will increase ASP. Thinks these price increases will even mitigate any decline in unit shipments.

Unlike ASML, CYMI has about 85% market share and hence share gains will not fuel significant top-line growth; but the rising ASP's coupled with the company's relatively new business model should help the company maintain a high-20's operating margin and improve bottom line. Expect service revenues to grow.

Weakness in June bookings and backlog, down 5% and 7% respectively, will likely pressure the stock short term. But, they are confident that CYMI's market share dominance will track the lithography market trends over multiple quarters.

CYMI has pulled back over 25% since May. Firm is cutting 2007 EPS estimates from $4.12 to $3.03 on more conservative margin and ASP assumptions. Applying a 13x multiple on FY07 estimates, and adding back excess cash to they arrive at a price target of $45.50 (down from $55.50). Believes CYMI can easily support a 12x multiple as rising ASP's offset and decline in units to continue revenue growth.

* Prudential is lowering their tgt to $63 from $68 but maintains Overweight rating. Notes there is no change to their core thesis that deep UV lithography segment will grow faster than the equipment sector as a whole. Investors are concerned with the low level of backlog, but the firm expects orders and backlog will recover in 3q.

Firm is lowering FY07 estimates because the non-systems revenue could start to slow as utilization rates dip. New CY07 revenue estimate is $717M, down from $770M. Non-systems revenues trend with utilization rates, which they expect will take a slight dip in 3q due to seasonality. They $63 price target is based on 20 times new CY07 estimate of $3.30.

Notablecalls: CYMI is the fist mid-cap, growth Semi Equip name to warn. Is CYMI the canary in the coal mine? Note that on call, the co said that over last several weeks, sentiment in Semiconductor sector has become cautious but was quick to note that it's still seeing robust and growing demand and does not appear that customers have over-ordered. I suspect there will be traders looking to buy this one for a bounce but I expect te bounce will not last for long as CYMI will not be the only Semi name to warn.

Color on quarter: Sigmatel (SGTL)

- Couple of firms are commenting on Sigmatel (NASDAQ:SGTL) after the co announced its results and divesture of audio codec business.

* JP Morgan is lowering their C06 revenue estimate from $186.0 million to $160.8 million and C07 revenue estimate from $245.0 million to $182.0 million. However, they are raising C06 EPS estimate from ($1.72) to ($1.32) and C07 EPS estimate from ($1.03) to ($0.84) due to lower taxes.

The audio codec business had gross margins of 40%, below average corporate gross margins of 45% for 2Q06. Firm views the divestiture as a positive for SigmaTel as it raises gross margins and improves the company's liquidity.

Although inventory days decreased 45 days QoQ from 185 days to 140 days, they remain well above the long term target of 60 days and the firm remains concerned on Sigmatel's higher inventory levels. The company commented overall MP3 demand for 2Q06 appears lower than expected, which has hurt end market sales. Firm notes, even market leader Apple's iPod shipments declined 5% QoQ from 8.5 million units in 1Q06 to 8.0 million units in 2Q06. Expects MP3 player demand to recover seasonally but are concerned some excess inventory could be left in the channel.

Sigmatel is trading at 0.8X C06 sales, below the low end of its normal trading range of 1X-3X sales. Firm remains concerned regarding Sigmatel's share loss and additional risk to estimates. Reiterates Neutral rating.

* Jefferies notes SGTL reported Q2 revenue of $44MM (+33% Q/Q), ahead of their estimate and consensus of $42MM. SigmaTel's 3600 product accounted for 15% of rev in Q2 driven by the ramp of Samsung's YP-Z5 and Creative ZEN V.

Co announced the sale of its audio codec business to IDT for $72MM in cash plus $8MM of balance sheet items. Given the current runrate of the audio codec business in Q2 ($8.6MM), SigmaTel received roughly 2-2.5x sales for this transaction. Although this transaction goes against SigmaTel's diversification strategy, they believe SigmaTel received an extremely attractive price and the cash from the deal provides much needed liquidity.

Firm's tgt of $4.50 is a slight premium to SGTL's cash/share of roughly $3.75 in Q3:06. Maintains Hold.

Notablecalls: Short term I expect SGTL to top out around $5 level. Longer term this may be the beginning of a turnaround.

Notablecalls - Paperstand

According to The Wall Street Journal, citing ppl familiar with the matter, Blackstone Group is considering a possible bid to top the $21.3bn leveraged buyout of hospital chain HCA (HCA). Deliberations over a bid, which is far from certain, are still in the early stages, and Blackstone hasn't yet invited other private-equity firms to join any potential offer.

The WSJ reports that to maintain his family's representation on the board of TD Ameritrade (AMTD), Chmn J. Joe Ricketts agreed to acquire millions of co shares. His purchase last week of nearly $114m of stock suggests he views this as a good time to meet that obligation. According to Chris Long, an analyst for data provider Washington Service, Mr. Ricketts's insider purchase was the largest by an individual executive or director at any company in more than a year.

The NY Post has learned that the auction for The Jones Apparel Group (JNY) is near death over price and concerns about the health of the co's brands, which include Jones New York, Anne Klein and Nine West. Two bidders, including Bain Capital, are still interested in acquiring the co, but the likelihood of reaching an agreement has diminished considerably in recent weeks, as price remains an obstacle. "I wouldn't say the Jones auction is dead," one person said. "But it's on life support." Jones' board is said to want no less than $34 a share, well above the co's current stock price.

Tuesday, July 25, 2006

Color on quarter: SNDK, CNET

- While the results from Sandisk (NASDAQ:SNDK) surprised the Street analyst commentary leaves me with only one question: Do we have to short it already in the pre mkt or can we wait a couple of days?

* Deutsche Bank notes SNDK posted better than expected (DB, Street, & market) 2Q results, but guided to weaker than expected (Street) 3Q. As they expected, it brought down full year royalty guidance and ASP guidance (though, still above industry peers - reason for some caution). Unless street believes guidance is conservative, 2H06 estimates are likely to come down. Firm continues to believe that SNDK is fairly valued with plenty risks (litigation, low price-visibility, structural NAND deterioration with new entrants, and consumer exposure), and retains Hold rating and $40 P/T.

* JP Morgan notes a strong quarter has been immediately priced into the stock, which traded up 19% on high volume post yesterday's $40.20 close to $48.20 (approximately 28% for the day vrs the SandP up 1.7%). Firm is incrementally positive because SNDK appears to be winning share and improving its business model, even during cyclical and seasonal weakness. SNDK looks set for a typically strong year-end, providing CE spending holds up. The margin outlook is buoyant through year-end, but could turn down slightly in 1H07 when Fab 3 yields peak and SNDK turns back to Samsung for non-captive supply, in firm's view. Capex associated with Fab 4 becomes a consideration in late 2007, which may weigh on the multiple somewhat.

Maintains Neutral Rating. If SNDK opens at the $48.20 indicated last night, SNDK will be trading at 17.1 times revised FY07 PF EPS of $2.82, a 13% discount to the mean of firm's coverage universe and a PEG of 1.2x on a 14% '05-'07 PF EPS CAGR. The multiple looks reasonable compared with SNDK's historical trading range (12.5-34.7x 2-year NTM P/E).

* Goldman says the stock had been trading significantly below our $46 price target and was likely over shorted into the call so the strong CY2Q2006 results should drive the stock closer to our price target. However, soft guidance will likely prevent the stock from trading too far above firm's price target as the guidance dampens hopes for a robust CY2H2006 in NAND as some had hoped. Theyprefer Intel (Buy), Marvell (Buy), and FormFactor (Buy) for when the group bottoms, likely later this summer, as they would wait on SNDK until we get better clarity on if/when additional licensees may be added, given that the royalty stream is the main driver of valuation.

- Stifel notes that contrary to investor concern, CNET Networks (NASDAQ:CNET) beat revenue expectations after the close last night. Other than cash position, the company did not provide any further financial details due to the ongoing options investigation. 3Q revenue guidance was above expectations, full-year outlook was reiterated and no longer looks as back-end weighted as it had previously.

Traffic growth continued to slow during the quarter with page views down 5% overall, but up 12% excluding Webshots, which commands disproporationately lower revenue/page.
Firm sees a greater potential of a company sale due to the options scandal and continue to see a potential takeover value of $13+. In their view, CNET shares offer old-media valuation with new-media growth - reiterates Buy rating and $11.50 price target.

Notablecalls: Stifel is about the only firm out positive on CNET this morning. Couple of firms, including Piper and RBC are lowering their tgts to $9. Still, I think CENT is one to watch as it's one of the last remaining pure-play internet content providers. They have 30+ mln users which is a lot.

Color on quarter: NTRI, RNOW

- Citigroup is defending NutriSystem (NASDAQ:NTRI) after the co announced its Q2 results last night. Stock traded down 13.5% in after market.

Firm notes stellar 2Q06 results indicate NTRI is in the early stages of its growth cycle. NTRI reported 2Q EPS of 53c and beat First Call consensus by 7c. NTRI had 168k new direct custs vs. guidance of over 155k custs. Importantly, the 2Q conf call revealed NTRI's Men's program could provide a very significant new market opportunity for NTRI (perhaps as big as women's).

The company announced the President/COO George Jankovic would be resigning due to family health issues after nearly 4 years with the company. Thomas Connerty, who has been with the company since November 2004 will serve as Chief Marketing Officer and EVP of Product Development effective July 25, 2006 (CEO Michael Hagan will assume the title of President). Firm notes CEO Michael Hagan will maintain his active role (as he has in the past) in marketing and operations. Overall, they do not view the changes as negative, given Mr. Connerty's background in the diet industry (previously served as Vice President of Direct Marketing at Nautilus) and role in creating and implementing a direct marketing program, which has contributed to NutriSystem's rapid growth over the past two years. Believes Mr. Connerty would make a solid CMO.

Firm is raising their EPS estimates by 27c each in '06-'08, respectively, to reflect the updated guidance and strong trends. Also raising long-term (2006-2010) EPS growth rate to 30% from 29% previously given new EPS estimates.

Tgt goes to $95 from $90. Reiterates Buy.

- While several firms are out cautious on Rightnow Tech (NASDAQ:RNOW) I chose to highlight the ones out in defense. Why? Because historically RNOW has been a bouncing stock.

*Deutsche Bank notes that with shares trading down in the after-market (likely due to excessive investor attention to near-term revenue and EPS guidance), they recommend investors look to RNOW's strong bookings (up 30% in 2Q and 49% YTD) and cash flow (up 168% in 2Q and 123% YTD) to asses business health. And while they acknowledge that an extended average contract length (now 30 vs. 24 months) inflates total bookings, the shift away from perpetual deals (15% of bookings YTD vs. 29% in 1H05) artificially lowers bookings results. Moreover, current bookings growth of 35% YTD illustrates the health in bookings despite a shift toward perpetual deals.

The company confirmed that it continues to hire aggressively with over 20% annual organic growth in quota carrying reps (QCR) at 124 reps and over 100% growth in open employment QCR positions currently. Management reiterated its bookings and cash flow guidance and stated that the pipeline is the best it's ever been.

FCF estimates for 2006 and 2007 are unchanged and they reiterate Buy rating and $22 PT. Using an after-market price of $12.50, shares are trading at 14x '07 FCF estimates (inline with the group). Firm believes these levels are compelling given RNOW's high-growth profile (40-50% bookings growth vs. the group grows in the low-teens).

* JMP Securities notes the bookings miss and lower guidance caused the stock to trade down 22% in the after-market. While the quarter was disappointing, they are not unduly concerned about RightNow's fundamentals. Although the business is lumpy, the firm believes RightNow has an industry leading on demand customer service product, little direct competition and strong free cash flow generation. Free cash flow was $0.13 per share versus estimate of $0.11 and $0.04 per share in the year ago quarter. Maintain their 2006 free cash flow estimate of $0.65 and ups 2007 free cash flow estimate from $0.70 to $0.75, primarily due to a lower assumed cash tax rate. As the on demand comps have fallen significantly, the firm reduces their price target from $23 to $18, representing a 2007 price to free cash flow multiple of 20x, in line with the peer group median.

Maintains Mkt Outperform rating.

Calls of Note Part 1

- Friedman, Billings, Ramsey comments on Formfactor (NASDAQ:FORM) noting that following Phicom's disappointing 2Q results from late last week, they believe there is a fear in some investors that FORM could also disappoint when it reports 2Q results on Thursday, July 27th, after the close.

Firm notes that that Hynix was the largest customer at Phicom, and following the recent agreement with FORM, investors should not be surprised to see the 50%-plus QOQ decline in Phicom's 2Q06 revenues as the firm believes FORM has been a clear winner at Hynix.

Additionally, with a new product introduction at Phicom missing deadlines, they believe there is even more share gain opportunity for FORM going forward. To that end, they expect FORM to meet or exceed 2Q revenue/pro forma/GAAP EPS estimates of $88M/$0.33/$0.27, which is at the high end of company's guidance range, and compared to the consensus estimates of $88M/$0.34/$0.28. Firm also expects the company's 3Q guidance to meet their already revised (up) estimates of $93M/$0.35/$0.28, respectively.

Reits Outperform.

Notablecalls: Not actionable but good to know category.

- Piper Jaffray is positive on Apple Computer (NASDAQ:AAPL) saying that in light of the results of our 200 person study of iPod users, they believe that Mac market share will rise over the next 12 months. Firm found that 9% of iPod users with PCs indicated that they plan to switch to a Mac in the next 12 months (a 9% "Halo Effect").

According to Piper in Nov. '04 they conducted a study of 200 iPod users throughout the United States and found that 10% of PC users planned to switch from PC to Mac within the next 12 months. During the 12 months following the survey, worldwide Mac market share increased from 1.8% to 2.5%, according to IDC's quarterly data. However, the announcement of the transition to Intel chips in Jun-05 caused Mac sales to slide and market share decreased over the next several quarters. As Apple completes the Intel transition in the next several months, the firm is confident that Mac market share will begin to increase again.

Maintains Outpeform and $99 tgt.

Notablecalls: Not actionable but good to know category.

- UBS is out somewhat cautious on Google (NASDAQ:GOOG) saying they believe that rev booked as Google sites rev is incrementally lower "quality" than previously thought. Firm now understands that there is TAC associated with some of this rev, it does not represent only "organic" growth, and is susceptible to competitive pressures. Also, generally assumed TAC rate calculations do not take into account TAC associated with Google sites rev.

This is important as it explains how some distribution deals flow through the income statement in unexpected ways. While the "bounty", or "installation" fees are generally booked as sales and marketing costs, the rev share portion of these deals will generally flow through as TAC. Of course, the amount of TAC from toolbar and other dist. deals is difficult to quantify.

Believes that most investors calculate TAC rates by dividing the absolute TAC by Google Network rev (e.g. 2Q TAC rate equals 78.8%). They think this is misleading, as the denominator does not reflect rev booked as Google sites rev. Therefore the "true" TAC rate is lower than 78.8%. This also explains why Google reports TAC as a percentage of total ad rev.

According to firm, while this knowledge does not change otheir estimates, it does incrementally lower their view of the "quality" of revenue from Google sites versus previous understanding.

Maintains Neutral and $460 tgt.

Notablecalls: I think GOOG is in a vulnerable position and statements like this may pressure the shares.

- Banc of America is lowering year-end 2006 and 2007 subscriber estimates for XM Setellite (NASDAQ:XMSR) to 8.2M (from 8.3M) and 10.8M (from 11.0M), respectively. Toyota's relationship with XM is strong, but they now believe the big factory installation ramp-up will occur with model year 2008 vehicles rather than 2007 vehicles.

BUT they still believe XMSR has more upside than SIRI. SIRI's EV is 44% larger
than XM's. This valuation premium looks unjustified for several reasons:

Retail growth was weak for the satellite radio category as a whole in 2Q and the FCC issue could linger for both companies. June data from NPD showed YoY growth of just 4% for 2Q. And product availability could be an issue for BOTH providers in 3Q until the FCC issue is resolved.

Also, both management teams have credibility issues, but only XM has signaled any
intention of addressing this. XM has taken several steps in recent weeks to address its organizational structure in an effort to improve execution (new customer service vendors, more marketing professionals, new COO). Meanwhile, Sirius management misled investors on the FCC issue.

Notablecalls: Looks like there is more downside in store for XMSR if it breaks the recent low.

Notablecalls - Paperstand

The Wall Street Journal reports, citing ppl familiar with the matter, that Honda (HMC) is expected to announce Tue morning at a major air show in Oshkosh, Wisconsin, plans to crack America's small business jet mkt. It wasn't immediately clear whether Honda is going to unveil specific business plans for its 4-5 passenger twin-engine jet, the Honda Jet. But those individuals said the co will likely at least tout that it is ready to make the final push to realize its 20-year dream to become a jet aircraft maker by trying to obtain official certification of the aircraft by the FAA.

According to the CNET News Symantec (SYMC) and Yahoo (YHOO) on Tue plan to announce a partnership to help secure consumers online, according to public relations representatives for Yahoo. The arrangement between the two co's will include "some new security offerings" according to an e-mail sent to reporters by Yahoo's pr agency.

According to the Barron's Online, Morgan Stanley Investment Mgmt disclosed that it now owns about 9.5m class A shares of New York Times (NYT), or a 6.6% stake, after paying a total of $34.2m for 1.4m additional shares.

CNET News discusses SCO Group (SCOX) and IBM (IBM) court battle. A Utah judge dealt the SCO a significant blow in June by throwing out more than 180 of the co's specific allegations of IBM programmers moving proprietary Unix code to Linux, or otherwise misbehaving. When SCO fired back last week with a filing that seeks to reverse that decision, it salted its justification with a few instances of IBM actions that SCO believes show its case. SCO accuses IBM of intentionally destroying evidence. "Weeks after SCO filed its lawsuit, IBM directed 'dozens' of its Linux developers within its Linux Technology Center and at least ten of its Linux developers outside the LTC to delete the AIX and/or Dynix source code from their computers. One IBM Linux developer has admitted to destroying Dynix source code and tests, as well as pre-Mar'03 drafts of source code he had written for Linux while referring to Dynix code on his computer," SCO said in the filing.

Notablecalls: Expect to see some interest in SCO shares. I'm not a legal expert, but "destroying evidence" sounds bad for IBM.

Monday, July 24, 2006

Calls of Note Part 6

- Prudential is very positive on The TJX Companies (NYSE:TJX) after an opportunity to walk a store and have a few hours with Carol Meyrowitz, President of TJX, Jeff Naylor, CFO, and Sherry Lang, IR.

Firm believes the story is clicking and the upside is really positioned to flow going forward. Basically what TJX is doing is going through each business to make sure they have the right fashion/content, the right/hot brands, and they are doing more of the buying off price rather than up front so they are building the margin.

At the same time, TJX is maniacally focused on cost reduction opportunities, and basically no stone is being left un-turned. The women's sportswear comp is already accelerating, the home business has improved, and the better brands won't even begin hitting until August. Firm thought Bob's looked markedly improved and it sounds like Carol Meyrowitz thinks AJ Wright can be an 8% margin business.

Prudential continues to think the TJX story offers excellent upside potential in 2006 and 2007. Averaging the trough (7.6% in 2004) and peak (9.8% in 1999) operating margin since 1999 yields an operating margin of 8.7%. If one applies that operating margin to our 2007 sales, the earnings would be $2.07 versus published estimate of $1.80. Even if TJX can just attain their operating margin goals by 2007 - which boil down to a total company operating margin of 8.0% versus published 7.6% estimate - they still see $0.10 upside, or $1.90 in earnings power. Applying the average high multiple of the last 3 years of 16.8x yields a $32 stock price.

Reits Overweight and $32 tgt.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 5

BB&T Capital Markets reiterates Buy rating and $64 12-month price target on MSC Industrial Direct (AMEX:MSM). Firm thinks MSM's multiple is again at levels that have generated significant investor interest in the past, making for an outstanding entry point.
Notes they've seen this show before. On July 21, MSM finished the day with a rolling weighted 12-month forward P/E of 16.6x. The multiple has been this low on only two recent occasions: in April (finished month at 15.8x) and September (finished month at 17.2x) of 2005.

In the first case, MSC's stock rallied from around $26--$27 to $38--$39 at its peak three months later. In the second, the shares rose from $32--$33 to $53--$54 six months later.
Directionally, MSC has softened with industrials; in order of magnitude, it has fared worse. It is off 28.4% since May 5, versus an average slide for firm's 13 industrial names of 19.4% and a dip in the S&P 500 of 6.4%.

Orders out of Kennametal (8%-plus) continue to point to strong metalworking demand. MSC's earnings report of June 29 was a fair bit better than that of its distribution "Big 3" peers, Grainger and Fastenal. MSC has a unique opportunity at this point in the cycle to accelerate sales growth and dial back spending as a result of the J&L transaction. This stock should be performing better than its peers, not worse.

Notablecalls: MSM is a bounce candidate.

Calls of Note Part 4

- Goldman Sachs notes that reports late Sunday evening suggest that HCA (NYSE:HCA) has reached a preliminary agreement with a private equity investors group led by Bain Capital and KKR for a leveraged buyout of the company that values HCA at $51 share, 6% above Friday's close and 22% above the company's 52-low from mid-June. The reported terms value HCA at 8.0x current estimate of 2006 EBITDA and roughly $830,000 per bed. This compares to 7.7x and $580,000 per bed for the hospital sector.

Within the sector, the firm highlights Triad Hospitals (NYSE:TRI). At 6.5x 2006 EBITDA Triad has the lowest EBITDA valuation in the hospital group. Applying HCA's 8.0x potential acquisition multiple to TRI would imply a $53 equity value or 32% appreciation from Friday's close. Firm reaffirms Buy rating on Triad and $50.50 price target.

Notablecalls: Expect to see some interest in TRI this morning.

- Morgan Stanley is defending Amylin Pharma (NASDAQ:AMLN) as investor concern has risen about a potential link between Byetta and pancreatitis (inflammatory damage to the pancreas).

Firm notes they examined the FDA's Adverse Event Reporting System (AERS) and medical literature for links between Byetta and pancreatitis. While there are 42 reports of pancreatitis in Byetta's AERS database, most are duplicative or from patients with an obvious etiology (e.g. gallstone, pancreatic mass, other drugs), and after adjusting for these factors, they find only nine cases (most have limited information, and may also have other risk factors). With almost 200,000 patients on Byetta, this rate is lower than the baseline 17 per 100,000 rate in the general population.

The FDA, physicians, and the general public are all sensitive to safety issues around drugs after recent setbacks such as Vioxx. However, the firm exits their review less concerned and with our investment thesis intact ($40-$50 trading stock for 2006 with potential to double in 3-5 years). They have not spoken with the company and look forward to Monday evening's earnings call, but would use meaningful weakness as a buying opportunity.
Reits Overweight.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 3

- Deutsche Bank is positive on Corporate Executive Board (NASDAQ:EXBD) ahead of results saying they are forecasting 2Q06 revs of $110.0mm and pre-FAS123R EPS of $0.52, in line with the Street. They expect the company to post another strong quarter with results ahead of forecasts for contract value and revs (at least 28%+ YoY growth for each), as well as for operating income, net income, and EPS.

Given strong contract value growth trends (+29-30%) they have witnessed through 1Q06, they think the stage is set for a probable increase in revenue guidance (to +27-28%) when the company reports 2Q06 results. Firm expects EXBD to reiterate bottom line guidance for 2H06, and to raise its year-end targets by any amount of upside it reports for 2Q06. Based on EXBD's April release, current 3Q06 forecast of $116.0mm (+24 YoY) in revs and $0.58 pre-FAS123R EPS (in line with the Street) is in line with the company's targeted range and looks very

Reits Buy and $125 tgt.

Notablecalls: Expect to see a bounce around the 200 MA level.

Calls of Note Part 2

Several firms are defending Halliburton (NYSE:HAL) this morning:

*Bear Stearns notes Halliburton reported 2Q06 EPS of $0.48 vs. BSC and consensus estimates of $0.49. Firm believes that last Friday's 8% decline in HAL shares was due to investors' disappointment with "in-line " results. Believes investors were looking for HAL to beat estimates in a more convincing fashion. HAL's earnings results may have added to growing skepticism regarding continued growth in North America.

Within the context of this business environment, it is not surprising that Halliburton announced that it is now pursuing a spin-off of KBR to Halliburton shareholders. In light of KBR's weak results and a difficult IPO market, a pure spin-off may be a better alternative. Although the company has not ruled out the possibility of an IPO (particularly if the OSX rebounds), it is no longer regarded as a necessary first step. Halliburton intends to seek a ruling from the IRS regarding the tax-free status of the transaction prior to a spin-off, and estimates the process will take six to nine months to complete. Firm believes the spin-off will unlock each division's true value, and ultimately lead to a higher stock market value for the stand-alone Energy Services Group.

Believes the current sell-of is overdone and that Halliburton shares represent a compelling investment opportunity. Maintains 2006 EPS estimate of $2.05 and 2007 EPS of $2.55, and continues to rate HAL shares Outperform.

*UBS says they think the sell off in the shares on recent weeks and specifically in response to earnings is overdone and given its competitive growth rate and returns its valuation is extremely attractive.

Firm notes mgmt reiterated its growth outlook and sees continued strength in both N American and international markets. The US market continues to grow despite concerns about gas prices. HAL saw strength both on and offshore in 2Q:06 which could continue through 2007. Their estimate for 2006 rises $.02 to $2.14 and estimate for 2007 rises to $2.71 from $2.53. The driver of the changes is stronger expected ESG revenues and slightly higher margins offset by more conservative assumptions for KBR, especially on the G&I side of the business in Iraq and a flatter backlog in E&C than expected.

Reits Buy and $50 tgt.

Notablecalls: HAL may prove to be a nice bounce candidate over the coming days.

Calls of Note Part 1

- Merrill Lynch would buy both Theravance (NASDAQ:THRX) and Cubist (NASDAQ:CBST) for the upcoming telavancin data. Firm believes that owning the pair into the data provides a natural hedge for current owners of each stock. Also, because they estimate that THRX is discounting a low probability of positive telavancin data and CBST is discounting a high probability of at least positive data, the firm believes there could be upside for both in the most likely scenario of telavancin demonstrating it is non-inferior to standard of care with positive trends.

THRX provides investors with a strong risk/reward opportunity with about $3 of downside risk and $13 of potential upside. Firm projects an expected return upon data release of 13%. The most likely outcome from the telavancin study is that the drug shows a trend toward superiority in patients with MRSA. In this case, the drug could achieve sales of $500 MM and the stock would be worth $26.

Believes the stock could range from $20 to $36/share, depending on the outcome. Importantly, a higher stock price would raise the chances that GSK will exercise its option to purchase half of THRX's outstanding shares at $54.25 in July '07.

Merrill estimates CBST is pricing in a high probability of positive telavancin data that would cause Cubicin growth to slow beyond 2007, which they think is unlikely. Firm estimates $2-4 of downside if telavancin shows superiority to standard of care, but $3-5 of upside if telavancin is non-inferior to vancomycin, which is the most likely outcome.

Notablecalls: THRX's telavancin is set to compete with CBST's Cubicin in treating serious skin infections (cSSSI). Analysts generally expect phase 3 telavancin data to be released in late Aug or early Sept. Not actionable but good to know category.

- Piper Jaffray comments on Apple Computer (NASDAQ:AAPL) after Microsoft confirmed that it will be launching music and entertainment products under the "Zune" name. While the company did not provide details on the specific product categories that would fall within the Zune family, a Microsoft made MP3 player that will compete with the iPod is widely expected. Another market segment that could be addressed by Zune is portable gaming. Microsoft offerings under the Zune name are expected by the end of CY06.

Firm believes the Zune initiative is a sign that Microsoft believes in the importance of the portable music market and has become uncomfortable with its partners'(Creative, iriver, Samsung, etc.) failures in gaining market share on Apple. They do expect Microsoft will be able to take some of Apple's 75% MP3 player market share away, but to what extent it is too early to say.

There has recently been a lot of talk about the potential for a Microsoft MP3 player and clearly Microsoft is rich with resources to compete with Apple. Microsoft's entertainment and devices division, led by Robbie Bach, is working on an end- to-end digital music hardware and software ecosystem to compete with Apple's iPod+iTunes. Piper does not believe, however, that the yet-to-be-seen Microsoft offering will be a worthy opponent for the iPod. One significant indication is that Windows Media-enabled MP3 players have been in the market for three years and have been unable to grow their roughly 25% market share. Additionally, they expect Apple will release new/upgraded iPods this fall that will likely push the envelope in innovation and ease-of-use.

Maintains Outperform and $99 tgt.

Notablecalls: Not actionable but good to know category.

Notablecalls - Paperstand

The NY Times reports that HCA (HCA) was close to a deal last night to sell itself to a consortium of private equity investors for about $21bn. The investors would also take on about $10.6bn of HCA’s debt, making the deal the largest leveraged buyout in history. The buyout group is led by Thomas Frist Sr., the founder of HCA, and his son, Thomas F. Frist Jr., who are, respectively, the father and brother of Senator Bill Frist, the majority leader. The other investors are Bain Capital, Kohlberg Kravis Roberts & Co and Merrill Lynch's private equity arm. With a value of $31.6 billion the deal would be even larger than Kohlberg Kravis Roberts’ $25 billion acquisition of RJR Nabisco in 1989.

The Wall Street Journal reports, citing ppl familiar with the matter, that AMD (AMD) plans to pay about $5.4 billion to buy ATI Technologies (ATYT) in what would be one of the biggest-ever acquisitions of a semiconductor maker. The co's were in late stages of negotiations Sun, with a deal likely to be announced as early as Monday morning. ATI had a mkt cap of about $4.2bn as of Fri. The consideration from AMD is expected to be mostly in cash, with the remainder comprised of AMD shares.

THe WSJ's "Tracking the Numbers" column discusses Bunge (BG), highlighting co's low-quality earnings. The co's financial statements are known for their complexity and have often carried one-time items that benefit the bottom line, causing some analysts to question the quality and sustainability of the earnings. Meanwhile, Bunge's free cash flow has been negative for 3 of the past 4 years. Bunge has a "black-box perception" in financial mkts, John McMillin, of Prudential, said during Bunge's Q1 earnings conference call earlier this year. He later added in a research note on the co: "We know a low-quality earnings stream when we see one."

Deerfield Mgmt, a hedge fund, has been making healthy purchases of Par Pharmaceutical's (PRX) stock, even as the drug maker's shares appear far from the path to recovery. Deerfield, which specializes in the health-care sector, disclosed that its holdings now exceeded 10% of Par's outstanding shares, up from a 5% stake the fund held in May.

Sunday, July 23, 2006

Notablecalls - Paperstand - Barron's

Barrons' cover story discusses general mkt condition and highlights ten stocks they recommend to buy, due low valuation. Those stocks include Chevron (CVX), Cisco (CSCO), Dow Chemical (DOW), General Electric (GE), Home Depot (HD), Lehman Brothers (LEH), Nestle, News Corp. (NWS), Vodafone (VOD) and Wal-Mart (WMT).

Barron's highlights Excelsior Large Cap Growth fund top holdings: GOOG, CELG, CMX, AMX, EXPD, ZMH, AAPL, QCOM, EBAY and AGN.

Barron's discusses ITC Holdings (ITC), saying that at 29, the co trades for 30x '06 ests. The shares could rally 20% in the next 2 years as profits rise. ITC is the nation's 10th largest and only publicly traded stand-alone transmission concern, which is poised to capitalize on regulatory changes that favor such independent entities. ITC focuses exclusively on the transporting of electric power, serving a population base of almost 10m customers in the metropolitan Detroit area and southeastern Michigan.

According to the Barron's, the housing mkt in Las Vegas may be overvalued by 42%. When it eventually tumbles, pinched residents are apt to curb their visits to Station Casinos (STN). The stock could be halved.

Notablecalls: The phrase "stock could be halved" sure does look ugly. Expect to see a steep (5-10%) drop in STN Monday morning.

According to the Barron's, Ashland (ASH) shares could be worth at least 20% more, if co spinoffs deliver the promised results. Putting all parts together and deducting corporate overhead at a multiple of 10x, Kip Meyer, of Advisory Research, arrives at a value of $5.83bn, or $81 a share. Such a valuation might interest private equity players as well: Morgan Stanley listed Ashland as a possible LBO candidate in a recent screening.

The "Follow Up" section discusses Yahoo (YHOO), saying that Barron's liked Yahoo at 29 and they like it more at 25. Yahoo took nosedive last week, when the co missed earning ests and delayed its search-engine advertising system. Larry Haverty of Gabelli Global Multimedia Trust has recommended that value-account clients at Gabelli buy Yahoo at these levels, noting that "unless Panama doesn't work at all, any problems with it are discounted." He calls the stock an "extraordinarily strong buy" at 13x trailing cash flow and sees the shares climbing to the high 30s, and possibly over 40.

Barrons' "Sizing Up Small Cap" section discusses favorably Energen (EGN), whose Alagasco unit is the largest gas utility in the state of Alabama. Regulators in Alabama are fairly accommodating, allowing Alagasco to earn an above-avg 13.15-13.65% ROE. For all of this year, Peter Vig, of RoundRock Capital, expects Energen to earn around $3 a share. Next year, he's looking for about $3.90. So the stock, at $38, is going for less than 10x the '07 est. Co's mgmt guidance for the year is $3.10-3.30 a share and $3.80-4.20 for next year. The shares are worth at least $50 or so, Mr. Vig reckons, if valued at a modest 13x his next year's est.

Barrons' "Technology Trader" section discusses Amgen (AMGN), saying that competition is growing for the co's cash-cow products. In Europe rivals are readying generic-style copies of its pioneering products. In US courts, Amgen fighting Roche Holding, which plans to sell a red-blood-cell-boosting treatment in America. And a more formidable rival in the EPO wars looms: Novartis (NVS). "We will have EPO in the European mkt, no question," Daniel Vasella, Novartis's CEO said to the Barron's. The EPO products from Novartis and Stada would compete directly against J&J (JNJ), which sells Eprex under license from Amgen. Novartis also has an indirect anti- Aranesp play; it owns a 1/3 of Roche, which sells CERA, a long-acting EPO product, in mkts outside the US. Amgen is trying to stop CERA from coming to America, by asserting its US EPO and Aranesp patents.

Notablecalls: No new information, biotech traders/investors know it all.

Friday, July 21, 2006

Color on Microsoft (NASDAQ:MSFT)'s results

- Microsoft (NASDAQ:MSFT) is getting mostly positive comments from analysts this morning:

- JP Morgan notes MSFT saw two items favorably impact results in Q4, both driving Client to be $150M ahead of firm's target and the upside to their model. First, PC shipments, as reported by Gartner came in at +11% at the higher end of co. guidance and second, MSFT saw a resurgence in Com. and Retail licensing which grew 6% yoy, the first growth in years-- a positive in front of the Vista release in the Fall. Client also saw an $89M favorable impact from the shift to recognizing rev. on sell in vs. sell through.

MSFT also saw a significant uptick in unearned income, which grew to $10.9B ahead of target of $10.2B with the $1.9B seq. increase the largest the firm has seen in years.

Beyond the strong bookings, the key event on the release is the announcement of $40B to be returned to shareholders with $20B near term in a modified Dutch auction. Firm assumes it will get completed at or near $24.75 per share, slightly ahead of the 90 day avg. of $24.50, which will result in roughly an 8% decrease in shares outstanding. The $40B is above the $20-30B they estimated MSFT would announce in their "First Step in the Road to Recovery" piece earlier this month, and is the driver for the roughly $0.06 raise to FY07 EPS guidance.

Firm's new EPS for FY07 is $1.46 +15% yoy, while FY08 is $1.72 +18%. The stock will move towards the upper end of the tender range near term, and will likely settle in the $24 range by late August. With Q1 numbers that look conservative, and an accelerating EPS story in 2H-07 and into FY08, they'd expect the stock to outperform as we near the December quarter and get closer to the major Vista and Office releases.

- Friedman, Billings, Ramsey MSFT notes MSFT reported a solid quarter with revenue and EPS upside, strong guidance, and a significant tender offer. The company announced a $20 billion tender offer, coupled with a new $20 billion share repurchase program; this is a smart use of the company's excess cash, should buoy the stock, and sends a positive message to investors. Firm's thesis remains intact - they believe the company is embarking on a significant multi-year product cycle which should drive accelerating revenues (11% in FY06 to 13% in FY07). Maintains Outperform and $32 price target.

- UBS notes that given the negative sentiment heading into last night's call, the performance in the quarter in and of itself would have been enough to push the shares higher today. However, by management finally heeding investor's call to action to return even more cash to shareholders with its announced $20b tender offer, firm's see this gesture as potentially leading to a reversal in investor sentiment as far as Microsoft is concerned. Guidance for FY07 implies a top line growth rate of 13% at the mid point, which compares to 11% growth in FY06, with operating income growing faster than sales in the back half of the fiscal year. As well, while many are focused on the fact that Vista could be delayed again and as such be a negative catalyst, we note that based on management's commentary and our own analysis, even a 1 quarter delay in Vista (although still expected to launch for businesses in November and consumers in January), would only impact sales for the year by $200m-$400m. Sees next Thursday's analyst day as being another positive catalyst for the shares and would expect more granularity regarding what type of return the incremental investments being made in FY07 could potentially drive for the company over the next 2-3 years.

Maintains Buy and $31 tgt.

Notablecalls: Nice qtr. Nice gesture. Don't expect the stock to move much above the levels reached in after mkt trading. It will take some time to turn this tanker around.

Color on Google (NASDAQ:GOOG)'s results

Several firms are commenting on Google (NASDAQ:GOOG) this morning after the co reported its Q2 estimates last night:

- Piper Jaffray says the second quarter is seasonally slow for search and, while they believe Google did gain some market share, search volume alone would not have created 9% sequential revenue growth. Piper believes Google's relentless focus on innovation both increased user activity, and hence paid clicks, and expanded advertiser coverage and monetization. The result was a highly respectable growth rate, not strongly above expectations as we had seen in 2005, but more appropriately balanced and still well above the market. This balanced growth creates more stability for the stock as Street expectations come closer in predicting Google's outcome, while upside still exists.

The premium that investors will pay for Google will not come from expectations of massive upside and analyst models changing dramatically, but rather from the fact that a $10b revenue company can still grow sales and profits at more than 75% y/y. Would be active buyers of Google ahead of what typically is much stronger second half.

Maintains Outperform and $600 tgt.

- Bear Stearns notes that in what has been a tough quarterly reporting season start for the Internet names, Google managed to hit Street expectations. While merely hitting Street expectations may not be overly impressing on the surface, what's probably most impressive was that the company continues to invest for the future while hitting near term goals. Firm thinks that Google's continued impressive market share gains, strong monetization, and rapid innovation indicate that so far their capital investments are paying off, and with competitors scrambling to catch up, they have no reason to think otherwise for the foreseeable future.

Maintains Outperform and $525 tgt.

- Goldman reiterates Buy rating with 25%-plus upside. Street estimates should move up given the outperformance vs. consensus, which should reinforce the strong secular growth outlook and be a net positive for valuation. Google's growth (just below heightened expectations) reinforces firm's view of continued strong secular industry trends, which should be more attractive to investors in a slowing cyclical environment. Google's ability to maintain its typical 800-1100 bp qoq growth spread vs. Yahoo! (at the low end due to affiliate search, see Exhibit 2) reflects its ability to leverage the Search Productivity Cycle to drive superior monetization.

- Prudential believes that Google will continue to post hyper-growth rates in the near term, which will, in turn, lead to further upside in the shares. In firm's opinion, an investment in Google is, in effect, an ownership stake in a company with maximum exposure to the online advertising market's fastest growing format. Therefore, they reiterate Overweight rating on GOOG and raise price target to $520 (from $500).

Notablecalls: Google won't move much higher from current levels until the co can show some serious FCF growth.