Tuesday, October 31, 2006

Calls of Note Part 3

Bear Stearns is commenting on Alnylam Pharma (NASDAQ:ALNY) after Merck (NYSE:MRK) announced its acquisition of Sirna Therapeutics (RNAI) at $13/share or $1.1bil, a 102% premium to RNAI's closing price on Oct. 30th, 2006 of $6.45. As Alnylam's closest comp, Sirna is advancing its lead candidate, Sirna-027, an siRNA drug targeting age-related macular degeneration (AMD), to phase 2 testing by year-end 2006.

Bear notes that Alnylam previously held two collaborations with MRK for RNAi drugs, which were consolidated in July, 2006. Under the current provisions of the collaboration, ALNY will receive R&D reimbursement from MRK earlier than under the prior agreement, and will have co-promote options for three out of nine Merck siRNA programs.

Firm believes the acquisition demonstrates the tremendous interest in RNAi therapeutics among major pharmaceutical companies, and remind investors that Alnylam has achieved collaborations with Novartis, Medtronic, Biogen Idec, and Merck, among others.

In firm's view, Alnylam's substantial IP position around siRNA drugs, and its demonstration of pioneering work for systemic application of its siRNA drug candidates now make it the leading RNAi company, and sole publicly traded pure play in the RNAi field.

Notablecalls: ALNY closed at $16.60 but following the RNAI news it traded close to $21 in after mkt. I think the $21-$22 level will be the maximum ALNY will reach in the n-t. Anything above that should have traders looking for cracks in buy interest.

Calls of Note Part 2

- Goldman Sachs is adding IntercontinentalExchange (NYSE:ICE) to their Conviction Buy List saying selling in the wake of the recent lock-up expiration has pressured the shares, even as fundamentals have continued to exceed expectations. Recent strength has been broad-based across futures and OTC products, shaking off threats from NYMEX and concern over potential dislocation in the natural gas markets. As a result, they are raising their estimates to reflect increased confidence in 2007 growth and see 34% of upside in the shares to new 12-month price target of $110 (from $79). Firm's Street-high 2007 earnings estimate of $3.05 reflects their assumption for approximately 25% growth in underlying drivers, which they believe is conservative.
Catalyst: Firm expects the release of October OTC commissions on Thursday (in conjunction
with a positive, but uneventful earnings report) to be a positive catalyst for the stock.

Notablecalls: This one is so much better than the CSCO call. The tgt goes up nicely and the rationale behind the raise is sound. I expect to see some buy interest in ICE but would keep it on a tight leash as the chart is telling me it may want to go lower before moving up.

Calls of Note Part 1

- Goldman Sachs is adding Cisco Systems (NASDAQ:CSCO) to the Americas Conviction Buy List.

Three key points: 1) Cisco expects to gain share in routing market from major competitors over the next two years on the back of new product introductions. 2) Video on the network holds the potential to drive network traffic growth from 70-100% per year to 200-300%, a trend that would help underpin its long term growth rate for 3-5 years. 3) They believe that in 2008, there is the potential for greater operating leverage as Cisco will likely be able to reign in its pace of spending on sales. Firm's $29 price target implies 21% potential upside.

Catalysts: 1) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 2) Evidence of new product traction in routing. 3) Share repurchase should boost earnings growth rate.

Firm's price target assumes a 20X multiple on FY2008 EPS of $1.42. They believe a 20X multiple is justified by Cisco's ability to grow sales 15-20% in FY2007 and 10-15% over the next 3-5 years.

Notablecalls: This is what RBC Capital had to say about CSCO this AM: Longer-term prospects remain strong for Cisco considering our view of router market acceleration and emerging market growth. Near-term, we are looking for broadly inline revenues for the seasonally weaker FY1Q07 which closed Saturday. And for a stock that is up almost 33% in the last three months we would wait for a better entry point considering our view that the company may post a book-to-bill less than 1.0.

I must say, Goldman sure has big set of cojones to recommend CSCO after the recent run-up. Don't see this as actionable. Sorry.


The WSJ’s „Ahead of the Tape” column discusses Valero (VLO), whose stock remains 23% below where it was at the start of August. That might make it a good time to buy. The main reason for the Valero stock tumble was that everybody built up inventories of gasoline and other energy products in expectation of more big hurricanes, which hammered refineries in ’04 and ‘05. With no big hurricanes this year, there is plenty of fuel on hand. That has pushed down profits. Refining margins are much lower than they were earlier this year. But they are still far higher than they were in the late ‘90s, says Howard Simons of Bianco Research, and they seem unlikely to go down much more. That is b/c US refineries still need to run at close to full capacity just to keep up with demand. Moreover, it seems unlikely that refiners will add much new capacity in the years ahead. So supply may be outstripping demand for the moment, but that might not last. "Over the long term, the refinery business is still a good business to be in," says Mr. Simons.

Barron’s Online “Inside Scoop” section highlights record sales by Travelzoo (TZOO) head honcho Ralph Bartel, that indicate more turbulence ahead for the already volatile shares. Late last week, Bartel, who has served as Chmn, CEO and president since founding Travelzoo in ‘98, sold 990K shares for $33.5m. His brother Holger Bartel, a Travelzoo EVP and director, sold 10K shares for $338K.

Monday, October 30, 2006

Calls of Note Part 5

Baird is positive on BioMarin Pharma (NASDAQ:BMRN) ahead of results (Nov 1), raising their tgt to $20 from $18.

This comes after surveying physicians treating patients with MPS VI.

The feedback leadsthem to believe their initial Naglazyme estimates were too low and the firm is raising their 2006 Naglazyme revenue estimate to $43.5M at the upper end of BMRN's guidance and raising 2007-2010 estimates to $69.7M, $94.4M and $119.0M and $143.7M, respectively.

In that Naglazyme's dose is weight-based, the primary catalyst for firm's upward revision is higher-than-expected patient weight. Management's original Naglazyme guidance was predicated on an assumed average patient weight of 20 kg. In speaking with a few high-volume centers between the US and Europe, they believe patient weight may exceed the assumed 20 kg average. Indeed, one large European center indicated average patient weight was 30 kg. For perspective, a 25 kg patient would bring approximately $335k in annual revenue, rather than originally modeled $270k figure.

Notes they are buyers of BMRN in front of the quarter.

Notablecalls: I would not be surprised to see some buy interest in BMRN today.

Calls of Note Part 4

- Stifel comments on on NutriSystem (NASDAQ:NTRI) noting it's a company that has been a phenomenal success story, having just completed a quarter in which it reported $155 million in revenue and added 235,000 new customers. The firm has long questioned the annuity value of NTRI's business and have been dead wrong on the stock but continue to believe they are dead right on the long-term prospects. To be sure, they note that if they are wrong about the annuitized value of the business, they believe 20x forward earnings is not expensive for its growth.

Firm believes the weight loss industry is one based on the psychological manipulation of vulnerable customers and, because of this, they pay close attention to marketing campaigns. NTRI has had phenomenal success growing this business but it is the basis of the industry that makes competition such a significant long- term risk.

There is a $120 billion pharmaceutical company named Sanofi-Aventis which has a product named Rimonabant, a drug which has shown significant promise in trials for the treatment of obesity. The drug also may help manage good/ bad cholesterol, type-2 diabetes, and nicotine addiction. Rimonabant is already being sold in Europe under the name Acomplia and is awaiting FDA approval in the U.S

On Sanofi's scheduled Tuesday morning earnings call, they believe investors should be focused on the success of Acomplia in Britain since its June 28 launch, an update on the launch in six other European countries in mid- October, and an update on FDA approval status in the U.S. The consensus view is that FDA approval will not occur by year-end 2006 as originally projected and could be pushed into early 2007. Given their belief that dieters are quick to try a new magic potion, Stifel believes NTRI investors should pay close attention to news out of Sanofi over the next several months, starting Tuesday.

As an aside, on October 12, the chief pharmacist for Aetna, an insurer of 8.3 million Americans spoke positively about the Sanofi-Aventis diet drug at the 2006 Obesity Congress, raising hopes that the U.S. insurer may include coverage for the drug. Firm believes health coverage for the Sanofi diet drug could make it a compelling alternative to existing uncovered diet programs.

Maintains Hold on NTRI.

Notablecalls: Oh boy! Oh Scott! That's what I call research! I'd be tempted to put out a small short position in NTRI today as the chart seems to be agreeing with Stifel here.

Calls of Note Part 3

We have two firms commenting on Sandisk (NASDAQ:SNDK) this morning:

- Baird notes checks as of late last week indicate very weak NOR flash bookings for the month of December, in sharp contrast with Q3, and suggesting a drastic reduction in lead times. NOR flash trends tend to correlate with other commodity semiconductor products and represents an indicator of general end demand. Several semiconductor companies are already implementing tight expenses control and/or hiring freezes, per firm's checks. In NAND flash, they are receiving additional feedback about weak iPod 8GB nano sales, suggesting further pricing weakness in November.

Weakness in December bookings problematic for Q1 revenue and gross margin guidances. Current slowdown induced by weakening consumer demand rather previous supply issues, in firm's view.

They are reducing estimates and price target on SNDK. Tgt goes to $60 from $68. Firm's new
2007 GAAP EPS estimate is $2.14, down from $2.30.

- UBS notes NAND Spot and Contract pricing are down -60% and -58% YTD and is generally
consistent with their model. Modest Spot activity in recent weeks with the most recent trend being one of firming points to supply/demand balance into the holidays. They believe this balance and beneficial exposure to handsets, digital cameras, and MP3s favors near-term SNDK accumulation.

Views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook that at this juncture in the quarter looks beatable. They are modeling $980M (+30% q/q, +31% y/y) in sales and $0.81 in pro forma EPS. Without a trial jump in SG&A (mkting/promos) to $93M (prior est $69.5M), EPS est would be $0.89.

UBS believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, they are seeing rivals struggle, divert capacity, and in some cases quit the market.

Reits Buy and ups tgt to $75 from $70. No changes to ests.

Notablecalls: I suspect we will see some weakness in SNDK early on. Baird's comments sound much more convincing.

Calls of Note Part 2

- Piper Jaffray is positive on Crocs (NASDAQ:CROX) following recent visit to co's China manufacturing facilities.

Firm thinks Crocs is at an inflection point in terms of cost leverage as diversification of product offering, sales channel, and geography provide catalysts for pricing power and margin expansion.

They are highly encouraged by the growing demand for the Crocs brand and rapidly expanding
distribution through both first-party and third-party doors in Asian markets. The company is opening branded retail outlets in high-growth markets, establishing a brand presence similar to the kiosk-model in domestic markets. Based on a population and assumed market potential, the firm estimates the company is in less than 10% of the total potential doors (est. near 11,500) in the Asian region.

Firm is raising their price target from $40 to $47. They think visibility around FQ4 sales and FQ1-FQ2 bookings is largely improved, providing support to firm's valuation objective. Additionally, they maintain an upward bias to earnings estimates.

Notablecalls: CROX reports earnings after the close on Thursday, November 2. Note that Baird is out previewing the qtr saying that for Q206 , CROX reported a $0.17 positive surprise, and they believe another large upside surprise is likely; however, they also believe that an earnings surprise is already in the stock, and they would remain on the sidelines, especially as Q406 is likely to be down from Q306 and as FY07 visibility remains limited. I would think about cashing in some chips ahead of the qtr. Possiblity into the buy interest following Piper's tgt raise.

Calls of Note Part 1

- Deutsche Bank is upgrading Komag (NASDAQ:KOMG) from Hold to Buy on upside from new opportunities. Firm views Komag's desktop business as more stable now that it is qualifying on 95mm programs with Samsung. In addition, they view Komag as very well positioned to expand into the 65mm/notebook market, which is growing faster than desktop. As Komag ramps new customers and products, and delivers on results, they expect the shares to move higher. Firm's $48 price target is based on 10x FY07 EPS, and the firm believes Komag could earn $5.00 in FY08.

They view Samsung as adding further stability to Komag's 95mm business and as buffering potential share losses at Seagate in 2008. At Samsung's current unit levels, analysis suggest 10% share at Samsung could drive an additional 1.5M units/Q (4% above 3Q06 levels). In addition, the firm views Komag as very well positioned to expand into the 65mm/notebook market and take share by leveraging its scale to deliver high-quality, low-cost products. At 5% share of the 65mm market, Komag could see an additional 3M units/Q (8% above 3Q06 levels).

Samsung has also been the fastest growing desktop HDD vendor this year, with C1Q06 units up 21% Y/Y and C2Q06 units up 62% Y/Y, outstripping Hitachi (20% and 36%, respectively), and Western Digital (15% and 16%), although Samsung is growing off of a smaller base than
Western Digital.

Komag currently trades at 7.7x DB FY07 estimate of $4.75, at a discount to its 3-year median FTM P/E of 10x. Firm expects the shares to trade higher as Komag ramps new customers and new 65mm media.

Notablecalls: As regular readers know I don't usually like highlighting rating changes on this page but this one may be actionable. Would not chase the frist upward brust, though. Think the stock needs to clear the $38 level in the coming days in order to move further up.

Sunday, October 29, 2006

Barron's Summary

Barron’s cover story discusses technology sector outlook. When analysts do survey corporate computing buyers, the CIOs indicate they will increase spending at the same 6-8% rate of the past few years. But tech-spending growth has actually exceeded that pace in recent months. With SepQ results in for about a 1/3 of tech co’s, they have surpassed expectations. Paul Wick's team at Seligman and Info Fund has one of the best records among large tech funds over the past few years. Mr. Wick favors ASML, CYMI, KLAC, MFE, STX, SYMC and SNPS. Pans include APCC, AVCI, CCI, DELL, NTES, NYT, KNOT and WBMD. 10 most widely held tech stocks are MSFT, CSCO, IBM, INTC, VZ, T, HPQ, GOOG, BLS and ORCL.

Blair Levin, a Managing Director at Stifel Nicolaus suggests that AT&T (T) may buy EchoStar (DISH). Also, DirecTV (DTV) may be a loser, as there are questions about its long term growth prospects.

Canadian Natural Resource (CNQ) stock, now 53, looks enticing. The shares could hit the 60s in a year and go much higher in the long run. The company might be takevoer bait, too.

Despite the Tellabs (TLAB) disappointing revenue outlook for the fourth quarter, the next three years look bright. The shares could climb more than 40% over that span.

DaimlerChrysler (DCX) shares are likely to be dead money right now. And they're likely to stay that way until definitive signs emerge of a Chrysler comeback or a corporate divorce.

According to the “The Trader” column, Glass Lewis, in a study to be released this week, tracked the regulatory filings in which co’s disclose option grants. Sarbox mandated that co’s report option awards to the SEC within 2 days of the grants in so-called Form 4 filings. Lots of co’s routinely miss the deadline, with rare enforcement action by regulators. Glass Lewis makes the case that filing Form 4s late and dating an options grant in the past when the stock price was much lower in itself can be suspicious. Glass Lewis names 9 co’s whose grants seem suspicious under this light. PLCE, HANS, ORLY, DRIV, AHM, WBSN, SIMG, KERX and MDTL are on the list.

“Technology Trader” section compares Dell (DELL) and H-P (HPQ). Dell shares have fallen 23% this year, while H-P's have risen 34.4% as HP has dethroned Dell as top computer maker for the first time in nearly 3 years. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the marketplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Some have begun to sense a turnaround in the next year or two. In the 2Q, the respected long-term value managers at Southeastern Asset Mgmt added 39.2m shares. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, of Oakmark Fund. "We think that, over time, this business model and this strong co will succeed."

Friday, October 27, 2006

Calls of Note Part 3

- Goldman Sachs is adding Tim Hortons (NYSE:THI) to Americas Conviction Buy List.

Firm notes that on July 17 they downgraded Tim Hortons to Neutral on concerns of overhang from the completion of the Wendy's spin - not fundamentals. With the passing of this event, they are adding Tim Hortons to the Americas Buy/Conviction Buy List and see 3 catalysts to drive shares to $34 price target. Central to this is firm's view that starting in 4Q2006, sales strength should begin to show better flow-through to EPS with the abatement of various cost inhibitors, such as one-timers, IPO-related costs, and higher revenues, to offset costs from the Guelph distribution center. They expect 20% upside and for momentum to accelerate in the name near-term.

1) Continued SSS strength - Further pricing action in various markets (they estimate 1-2% lift) and the breakfast sandwich roll-out in Canada (they estimate another 2-3% lift) should maintain strong SSS momentum.

2) Expense confusion surrounding 3Q ends, 4Q starts anew - IPO-related expenses, one-timers and the delayed leverage from the Guelph distribution ramp clouded 3Q. GS expects that when 4Q results are reported, the underlying earnings power of the business will materialize.

3) Share repurchases - Tim Hortons' buyback program could ultimately be $0.03-$0.04 accretive to EPS in 2007.

Notablecalls: Actionable call alert! I think THI will see some buy interest today.

Calls of Note Part 2

Several firms are commenting on Intersil (NASDAQ:ISIL) after the co last night announced the immediate departure of President and COO Lou DiNardo.

- CIBC notes that given the high regard with which DiNardo is held both within the analog (HPA) industry and on Wall Street, they expect ISIL shares to see some softness today.

The firm is surprised by DiNardo's hasty departure as he was considered by many (including CIBC) to be current CEO Rich Beyer's heir apparent. ISIL continues to have a solid management bench and bright prospects, but, in their opinion, DiNardo will be missed.

As a core member of one of the industry's premier mgmt teams, DiNardo was, in firm's view, a key driver behind ISIL's strong fundamental performance over the past two years. He helped successfully expand ISIL's presence in the critical handset and notebook end markets, among others.

Despite the departure of his two top lieutenants over the past 12 months-- current SMTC CEO Mohan Maheswaran and now DiNardo--we expect CEO Beyer to push forward with his current (successful) game plan of taking market share while growing ISIL's served addressable market.

- Merrill Lynch notes the departure yesterday of President and Chief Operating Officer Lou DiNardo is both surprising and disappointing. Firm's checks following the announcement suggest that the departure was driven by a disagreement between Mr. DiNardo on one hand, and CEO Rich Beyer and the board of directors on the other, regarding Mr. DiNardo's operating management of Intersil since ascending to the COO job ten months ago. Mr. DiNardo has been an important and visible contributor to Intersil's success since joining the company in 2004.

The resulting challenges are several. First, Rich Beyer must step back into a day-to-day management roll, something that he'd ceded to Mr. DiNardo and claimed to be interested in moving away from. Picking up where Mr. DiNardo left off could be tough. Secondly, Mr. DiNardo is well regarded within the analog IC business, and minimizing the hit to morale within Intersil will be important.

In fairness, the firm believes Rich Beyer is the architect of Intersil as it looks now, and all of the big decisions - selling WiFi, buying Xicor - were his. ML thinks he's capable of meeting the challenge that he's created by dismissing Mr. DiNardo, and on that basis they maintain their positive recommendation on the stock. However, they can't deny that much of Intersil's recent operational excellence is attributable to the efforts of Lou DiNardo. Getting someone else into place with similar talent and energy is we believe now job 1 for Intersil's management.

Notablecalls: Expect to see weakness in ISIL. The stock was down 2% in after hrs trading and I suspect there will be more weakness today and in the next couple of days.

Calls of Note Part 1

- Deutsche Bank comments on Intuitive Surgical (NASDAQ:ISRG) noting the co delivered upside across the board for 3Q. Management continues to execute seamlessly in capturing the robotic surgery market opportunity with uptake increasing across specialties. Though urology remains the biggest growth driver for the company, uptake in gynecology remains swift and the firm believes continued momentum in this arena will be critical to growth in system placements over the next several quarters.

ISRG reported 3Q revenue of $95.8m, +57% yr/yr and comfortably ahead of DB forecast and consensus, both at $88m, despite a typically slow 3Q. EPS were $0.45, well ahead of forecast and consensus. In light of the 3Q upside, management once again raised guidance, and the firm has increased their forecasts.

The company sold 42 net new da Vinci robots in the quarter, exceeding DB forecast of 40 systems. The company sold 4 upgrades (hospital converting older system to the newer da Vinci S). A growing number of hospitals are purchasing second systems (12 in 3Q), reflecting strong utilization trends and expansion into new procedures at these centers. During the quarter, the UPenn hospital system purchased three systems (total of four at hospital) and Beaumont Hospital bought two units (total of three at hospital) in their efforts to establish robotic surgery "centers of excellence", and the firm would not be surprised to see other institutions follow suit. Internationally, the company continues to make inroads in large markets, having placed the first da Vinci system in mainland China during 3Q.

Maintains $140 tgt on Buy rating.

Notablecalls: Correct me if I'm wrong but didn't ISRG make $0.44 in EPS in Q206 and $0.55 in Q305? That doesn't make the $0.45 headline number too flashy, does it? Guess that's the main reason the stock failed to hold the initial gains in after hrs trade.

Color on quarter: Microsoft (NASDAQ:MSFT)

Pretty uneventful quarter from Microsoft (NASDAQ:MSFT):

- Goldman Sachs notes Microsoft reported first (Sept) fiscal-quarter results that were above expectations, with EPS of $0.35 vs GS $0.32 estimate. Revenue growth of 11% was above GS 8% estimate. Full-year guidance is about the same as before.

Management does not appear to have increased the range of expectations for the remaining quarters of the year, mostly just flowed through first-quarter upside. Second-quarter (December) revenue guidance is in line with firm's expectations but EPS of $0.22-$0.24 is below our $0.26 estimate, possibly reflecting both the lower accretion (smaller than originally expected Dutch Tender offer) and also perhaps some greater product launch costs. With no material changes to full-year estimates, this quarter may be less eventful than prior earnings reports.

Deferred revenues were down $810 million sequentially, not as bad as the $1.1 billion decline they had assumed. With new products upcoming, they think better news is ahead of growth, and maintain Buy rating and Conviction List Buy.

- JP Morgan notes the first quarter looks a little better than expected on cost discipline, and while the Q2 guidance was sloppy--this was largely expected. More importantly, we saw what appear to be solid bookings for Office (firm second product catalyst following the timely Vista delivery) and MSFT was able to re-affirm rev. and EPS for the year. With the Q1 hurdle behind the company, the firm continues to expect the stock to outperform as we near revenue and EPS acceleration in 2H-07.

1) Xbox units looked light and MSFT appears to be behind on its targets, 2) net the deferrals, operating margin targets for Q2 look low, 3) weak search rev. again hurt MSN, 4) unearned saw a re-allocation lines, 5) MSFT maintained PC targets for the year-despite a weaker Q1 and 6) full yr. guidance tweaks up 2H margins.

Assuming CY07E EPS of $1.63, Microsoft currently trades at 17x,a discount to the peer group, which trades at roughly 23x CY07E EPS. At current levels, they believe the stock largely discounts the risk associated with the story and represents a highly attractive risk/reward investment in several large and diverse software markets. As such, they rate Microsoft an Overweight.

Notablecalls: Not actionable but good to know category.


The WSJ reprots, citing ppl familiar with the matter, that Cemex (CX) is lining up an acquisition of Rinker (RIN) amid a flurry of deal discussions in the sector, say. Rinker has a mkt cap of nearly $10bn.

Barron’s Online discusses Dell (DELL), whose shares have fallen 23% this year. Based on ests by Gartner, Dell probably had its worst quarterly growth in PCs in the co's history in the 3Q. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the mktplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Dell shares have climbed 15.9% since hitting a low on July 21 as some sense a turnaround in the next year or two. In the 2Q, Southeastern Asset Mgmt, Dell's 2nd-largest holder after Chmn Michael Dell himself, added 39.2m shares of the co for a total of 111m shares, just under 5% of the co. Other buyers include funds managed by Barclays Global Investors, State Street and Vanguard Group. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, who helps manage $6bn in assets in Harris Associates' The Oakmark Fund. "We think that over time this business model and this strong co will succeed."

“Inside Scoop” section reports that several weeks agi Saks (SKS) Chmn R. Brad Martin was nabbing profits selling the luxury-retailer's stock. Now he's buying up depressed shares of First Horizon National (FHN) where he also serves on the board. Martin, a First Horizon director since ‘94, spent nearly $9.6m to purchase 250K shares of the co on the open mkt earlier this week, increasing his stake fivefold to nearly 300K shares.

Thursday, October 26, 2006

Calls of Note Part 2

And now for today's favourite fade opporunity:

- Citigroup is upgrading Business Objects (NASDAQ:BOBJ) to Buy from Hold following strong results announced last night.

According to Citi BOBJ reported stellar 3Q06 results with licence revenues of $131.6m (CIR: $122.0m), total revenues of $310.4m (CIR: $295.1m; BOBJ guidance: $293m-$298m), pro forma EBITA of $53.0m (CIR: $43.7m) and pro forma EPS of $0.41 (CIR: $0.34; BOBJ guidance $0.32-$0.35).

The strong set of numbers and increase to 4Q06 guidance is an indication that the business is back on track. Management appears confident about the general environment, upgrade opportunit,y and Johnson Controls shows it is winning all important standardisation deals. After a frustrating 2Q06 wobble the firm notes they have renewed confidence in management's ability to execute and are upgrading the stock to reflect the strong fundamentals and consensus increases that are likely. They have increased their price target to $45 which reflects a modest 8% growth rate and 20% operating margin in their DCF model (both of which should be more than achievable).

Notablecalls: Yeah, Q2 was weak. Several deals failed to close. Fortunately for the co, the deals closed in Q3, helping to produce a qtr that was somewhat stronger than analysts were expecting. The funniest part? Citi downgraded BOBJ on July 26. Just before things got better. I think the money that helped the stock to move from sub-$20 will be looking for an exit. Getting out while things look good makes sense. There has been talk of a possible acquisition and I must say the valuation already reflects it, thus making it less likely. Think one needs to put BOBJ on the radar looking for cracks in buy interest above $36 level.

Calls of Note Part 1

- Lots of comments on Red Hat (NASDAQ:RHAT) today after Oracle announced its intentions to enter the enterprise Linux paid support market, specifically providing support for code based on Red Hat Enterprise Linux. As part of Oracle's announcement, it suggested that it would be offering support for Red Hat Enterprise Linux customers at a discounted price ranging from 50% to 60% off Red Hat's published list pricing for RHEL ES and AS.

- JMP Securities is reducing their rating on Red Hat from Market Outperform to Market Perform. While they believe Red Hat remains well positioned to benefit from the proliferation of open source software, the depth of Oracle's announcement regarding its entry into the Linux support market is likely to create an overhang on Red Hat's shares. In particular, Oracle's suggesting that it has developed a technical network capable of supporting and migrating Red Hat customers. Its endorsement from a number of channel partners and its aggressive pricing are likely to make selling conditions quite difficult for Red Hat over the near term. Absent hard evidence suggesting that Oracle's efforts are proving less than successful, the firm believes Red Hat's shares may remain under pressure. The firm is lowering their FY07 operating cash flow estimate from $0.91 per share to $0.85 per share and FY08 operating cash flow estimate from $1.15 per share to $1.02 per share. They are reducing FY07 EPS estimate from $0.52 to $0.50, in line with consensus, and FY08 EPS estimate of $0.70 to $0.61, $0.05 below consensus. Using the aftermarket price of $16.33, Red Hat trades at a FY08 P/FCF estimate of 18x.

- Deutsche Banks thinks the likely impact on pricing and Oracle's position within the IT data center could significantly cap Red Hat's fundamental growth and valuation multiple. Firm maintains Hold rating while lowering estimates and target price to $15.

Oracle has an expansive support organization to create a competitive offering. In addition, it is clear from the press releases that a number of major customers and partners (Southern Co, McKesson, Dell, Intel, IBM) appear to be endorsing Oracle's Linux offering. Even if Oracle does not have immediate success with its offering, they believe the 50% price discount to Red Hat will likely enable Red Hat customers to be aggressive in gaining pricing concessions vs. Red Hat.

Firm likens the situation to Microsoft's competitive threat to Symantec and McAfee in 2005. While it is still unclear what Microsoft's impact will be on SYMC and MFE's business,
SYMC/MFE EV/FCF multiples compressed roughly 56% from a peak of 20x/19x in Dec '04 to 10x/8x in April '05. The impact on RHAT is unclear, but they believe further multiple compression is possible. At $16.33 (after-market indication) RHAT is trading at 15x reduced forecasts. This still represents a premium to the group.

Notablecalls: I would not play RHAT for a bounce today. Think there will be more downgrades
over the next couple of days that will force the price even lower. But I do think that RHAT will become a nice bounce candidate after that as ORCL's entry will take some time and will not have an immediate effect on RHAT's results. Also, check out how MFE performed in 2005.

Color on quarter: FormFactor (NASDAQ:FORM)

Several firms are commenting on FormFactor (NASDAQ:FORM) after the co released in-line results but guided down:

- Goldman Sachs notes their call to buy the stock into earnings was terrible. However, weaker than anticipated guidance doesn't change their view that FormFactor is the best positioned SPE company over the intermediate-term. They would therefore aggressively buy the stock on weakness, as they believe: 1) growth opportunities for FormFactor are better than for any other SPE company and most other Semi companies; 2) share weakness post the report has left the stock under-valued, as the firm believes FormFactor can achieve $125m in quarterly sales and $0.50 in quarterly EPS or ~$2.00 in annualized run-rate EPS when capacity ramps in 2007; and 3) the stock is heavily shorted (8% of shares are short), creating the possibility of a gap up in the stock as the market begins to refocus on the intermediate-term growth prospects.

They see ~15% upside to 12-month price target of $50, which is based on a 25X multiple applied to ~$2.00 in annualized run-rate EPS.

- Deutsche Bank says they are cutting estimates after weak guidance for the December quarter. The firm had confirmed the delay with the new NAND product prior to the earnings release and view it as a short term issue. But attributing the slower growth to a delay in
the 70nm DRAM design shrink came out of the blue. Firm recommends accumulating the
stock for the new product story in 2007.

New products should support strong growth next year assuming the base DRAM business benefits from design shrink. They think the new Harmony product (one of two new products) alone could add $50-75 million in sales next year. KGD (Known Good Die) is the other new product segment.

Firm thinks the Harmony technology is proven at 200mm and FORM is shipping cards to Hynix. The 300mm product will move into production in the second half. Channel checks point to 300mm integration issues with the tester but nothing that appears to be a show stopper.

Tgt goes to $45 from $47 with Buy rating maintained.

- JP Morgan notes Management indicated that the current high level of profitability being experienced by DRAM manf was causing them to delay their transition to the 70nm tech node. This reasoning is hard to accept and the firm believes the weakness in the DRAM outlook is more likely attributed to a slower than expected adoption of DDR2 DRAM. They suspect expectations for a fast DDR2 adoption rate caused those manf to order more new probe cards than was actually necessary in C1H06, and that those same DRAM manf are now working through those cards. This will only have a short term effect on FormFactor's outlook and, absent any incremental competitors coming on the scene, new product design dynamics for DRAM should continue to support FormFactor's longer term DRAM probe card revenue growth rate.

Book To Bill declined to .93, the lowest level since C4Q04 This increases the likelihood for the company to miss guidance and is likely to limit stock outperformance in the near term. Management stated that lead times have declined moderately as the new factory has ramped, but the fim does not believe the company's ability to turn more business during the quarter is enough to offset the declining order outlook.

Reiterates Neutra nnd would stay on the sidelines at this time due to the lower than parity book to bill ratio and increasing nearness to the seasonally weak C1Q07 for memory. These factors lead the firm to believe there is unacceptable level of risk associated with the stock given its significant valuation premium vs. coverage universe. They would either prefer to wait for a lower stock price or for near term fundamentals to improve before becoming more positive on the stock.

Notablecalls: I agree with JP here. High profitability hasn't been an issue for the DRAM sector for a long time. FORM has been a semi darling, beating ests over and over again. Now that they stumbled, some of the hot money will leave the stock causing significant pressure. Altought the general sentiment is still bullish and supportive, I would not be looking to play a bounce in this one.


The WSJ reprots that accelerating the buyout boom and putting some of the world's biggest public co’s in reach, Blackstone Group has decided to increase the size of the world's largest private-equity fund to $20bn. The move by Blackstone, which already had raised a record $15.6bn for the fund from investors, secures bragging rights for now in an industry that has several other giants looking to create funds of $15 bn or more. Investment strategists who compile lists of potential tgts in recent weeks have pointed to Home Depot (HD), Dell (DELL), and Texas Instruments (TXN). In Europe, investment bankers point to other big names, including BT Group (BTY) and Unilever (UN).

According to the WSJ, with Detroit's auto industry struggling through its darkest days in decades, some big investors are betting billions of dollars that the auto-parts sector is poised for a comeback. At Lear (LEA), investor Wilbur Ross says his deal to acquire its $3.5bn N-American interiors business "should be resolved in the next few days, no later than next week." Mr. Ross says he has signed confidentiality agreements with eight other suppliers. "It seems like the whole components business is for sale," he said. Another hedge fund, Pardus Capital Mgmt, has spent $109m this year to acquire 14% of Visteon’s (VC) stock, making it that supplier's 2nd-largest shareholder.

“Heard on the Street” column discusses Wild Oats Markets (OATS), which long has seemed like a plate of cold leftovers next to Whole Foods Market (WFMI). But it may just be the tastier stock. That conclusion was bolstered by the stock mkt's reaction to last week's news that Wild Oats wouldn't renew the contract of CEO Perry Odak and yesterday's announcement that he had quit. Though Mr. Odak had led the co through a 5-year turnaround, the stock price rose both times. Mr. Odak was criticized for being too timid in trying to grab customers who favor Whole Foods' sprawling stores. "Investors would be happier to see a mistake being made being too aggressive in new-store formats than to see the opposite, which is them being too conservative," says Eric J. Larson, of Piper Jaffray.

Barron’s Online discusses UnitedHealth (UNH), saying the co may find clear skies again. In March, allegations started flying that CEO William McGuire and others unfairly benefited from backdated stock-option grants. Last week, McGuire stepped down as Chmn and agreed to depart as CEO on Dec. 1 after an internal report found that millions of stock options were likely improperly backdated at the co during his tenure. Certainly, the report could add gas to shareholder lawsuits and probes by the DEC, the DOJ and Minnesota's attorney general, which could cost United in fines and settlements. But the stock already reflects these widely known concerns. Despite its woes, UnitedHealth remains an earnings machine, generating profit growth that is more than double that of the broader stock mkt. And with a cheap multiple and uncertainty about the stock-options scandal fading, the shares appear attractive."The stock is severely depressed and it's not justified," says Christopher Bonavico, manager of the Delaware Select Growth Fund. "When I look at where United's earnings could be in 3 years, this stock looks dramatically cheap."

“Inside Scoop” section reports that Morgan Stanley and Goldman Sachs units have both taken profits in IntercontinentalExchange (ICE) as the stock surged. Goldman Sachs has lowered its stake in the co to 4.7%, or 2.7m shares, down from 7.5%, or 4.26m shares. Morgan Stanley also disclosed on Oct. 24 that it had lowered its stake in ICE to 4.23%, or 2.4m shares, down from 7.4%, or 4.2m shares.

Sharesleuth.com has real nasty piece on UTEK (UTK). Last time they highlighted Xethanol (XNL), that saw its shares drop sharply after the post. Read whole story here.

Wednesday, October 25, 2006

Calls of Note Part 2

- Goldman is adding Western Union (NYSE:WU) to their Conviction Buy List with a price target of $25, implying 25% return potential. With solid 3Q2006 results and the beginning signs of stabilization in domestic and Mexico transactions now behind us, the firm believes the myopic focus on near-term trends should begin to slowly fade, and Western Union's compelling international expansion opportunities, the strength of its highly productive agent network, and its industry-leading 25% return on invested capital should garner more serious attention. They expect the December quarter to mark a trough for fundamentals, and recommend building positions in WU now.

Key catalysts for the stock are: (1) A potential preferable outcome from the hearing with the Arizona Superior court on October 30. 2) Further evidence in the December quarter (particularly post-elections) of stabilization in Mexico and domestic transaction trends.

Notablecalls: Expect to see buying interest in WU today and in the coming days. Picks in GSCO's Conviction Buy list have performed pretty well.

Calls of Note Part 1

- Prudential notes that according to Mercury, Intel (NASDAQ:INTC) MPU ASPs have declined by 22% over the past 12 months, after enjoying a 3 year period of stability. Drilling down further into the Mercury data reveals 2 concerning trends:

1) In the desktop MPU segment, ASPs declined by 23% over the past 1.5 yrs, and the emergence of "Midrange" MPUs (priced at new ASPs in the "seam" between historical Performance and Value price points) appears to be cannibalizing high end MPU sales. Our concern is that this segment continues to cannibalize high end MPUs, causing continued price erosion in the desktop MPU stack.

2) In the mobile MPU segment, ASPs declined by 21% over six quarters, with price pressures in both low-end and high-end segments.

Firm thinks that the ASP erosion is driven by 1) the high-end MPU is providing more functionality than the mainstream consumer needs or is willing to pay for, and 2) after struggling in 2002, AMD has emerged with both a product cycle and material capacity for the first time in perhaps a decade. They don't expect these dynamics to materially change and expect continued ASP erosion for Intel.

Firm remains concerned about Intel ASPs and margins.They remain Underweight the stock.

Notablecalls: Not actionable but good to know category.

Color on quarter: Cymer (NASDAQ:CYMI)

Several tier-1 firms are defending Cymer (NASDAQ:CYMI) this AM after the co issued in-line results but lowered Q4 guidance:

- Merrill Lynch notes Cymer's record 3Q results were in-line with expectations but the 4Q outlook fell short due to advanced laser shipment delays to 1Q07. Although disappointed with the pushouts, the firm believes this is a one quarter timing issue, rather than a change in fundamentals. Momentum should resume in 2007, both for revenues and margin expansion. Thus, they see weakness in the stock is a buying opportunity as are raising 2007 estimate and reiterate their Buy rating and $59 PT.

Cymer reported 3Q EPS of $0.68 above our $0.65 consensus estimate on 6% Q/Q revenue growth. Gross margins improved to 49.6% from 47.9% Q/Q. ASPs were up 10% to $1,064K. Higher utilization of light sources drove consumables (service and spares) to record levels at 50% of sales on a growing installed base.

3Q Orders of $142 million increased 11% Q/Q, slightly above ML's $140mm estimate. Cymer guided 4Q revenues to decline 5-7% Q/Q and gross margins of 48% due to XLA 300 (immersion) pushouts. These carry higher ASPs and margins so the impact on 4Q is large, but shipments should occur in 1Q07.

Firm lowered their 2006 estimates to reflect the XLA 300 pushouts from $2.45 to $2.30. 2007 estimate increases from $3.00 to $3.05 driven by operating margin expansion. They are initiating 2008 EPS estimate of $3.55.

- JP Morgan notes Cymer reported in line C3Q06 results ($0.72 PF/$0.68 GAAP) with decent margin expansion and impressive cash flow. Relative to C4Q06 guidance, this is the
first major disappointment that the co overtly missed in quite some time. While it is tempting to get negative on this story given the deep pot hole from a near-term fundamental momentum perspective, they are not. Cymer demonstrated its business model potential in C3Q06 with GMs at 50% and $50 million of free cash flow. Based on the probability of consistent above-average growth and secular margin expansion, combined with sudden valuation contraction, they are maintaining their OW rating and recommend buying the stock on weakness, aggressively in the low $40's or worse.

At $39.50 (post close), CYMI shares trade at 12.3x C2007 PF EPS estimate of $3.20 versus
universe average of 13.2x. Despite a near-term momentum pause in the rate of Cymer's financial progression, given the gestating immersion story, expanding secular margins, and laser-based litho growing as a percentage of total lithography market, the firm expects CYMI shares to offer secular above-average EPS growth potential, which should drive stock price outperformance over time.

Notablecalls: CYMI's a keeper here. No question about. JP's wrong here saying it's the first miss in quite some time. CYMI has guided "down" several times over the last 18 months. And it always bounces as the more savvy traders know there is still lots of demand for their tools. Just take a look at ASP's up 10%! CYMI's a winner here. Buying it down 12% will most likely make you money.


According to the WSJ, some investors are starting to think Clear Channel Comm. (CCU) might be ripe for a family-led buyout. But like many media co’s, Clear Channel has been hurt in recent years by a soft ad mkt, which arrived just as the industry faced greater competition from rivals such as satellite radio and iPods. Ppl familiar with the situation say CEO Mark Mays is frustrated by the stock's inability to push much past $30. Meanwhile, Clear Channel's performance has put the co on the radar of some activist investors. The California Public Employees' Retirement System added Clear Channel to its corporate focus list this year, citing concerns such as the stock's underperformance over the past 5 years. And recent filings show that Highfields Capital Mgmt has taken a 1% stake in the co. The situation has many observers speculating the Mays family's next move may involve some kind of deal to take the co private.

“Heard on the Street” column discusses Comcast (CMSCA), whose shares hit 52w high yesterday. The co will report 3Q earnings tomorrow that are expected to show strong sales. Comcast is set to unveil Fearnet, a collection of horror movies and other scary programming that the co plans to make available on its Internet portal, its VOD service and to cellphone users. Moves like Fearnet also tend to reassure investors that Comcast isn't about to use its high-priced shares to launch another huge takeover bid, as it did in its ill-fated effort to take over Disney in ‘04. Rumors have been circulating for weeks that Comcast has in its crosshairs co’s ranging from SprintNextel (S) to Yahoo (YHOO). Such a move by Comcast would likely depress shares b/c, as with the Disney bid, it would indicate mgmt was unsettled about cable's long-term future. Indications the co isn't interested in major acquisitions right now should have the opposite effect.

According to the Barron’s Online, lately, there's been a buzz in the mkt about electronic derivatives exchanges such as the International Securities Exchange (ISE) and Intercontinental Exchange (ICE) following the CME's $8bn offer for the CBoT. "Portfolio managers are saying that no sector is experiencing so much change and growth," says Richard Herr, of Keefe, Bruyette & Woods. Article suggests that an investor should buy exchange stocks b/c profit margins are high and fee-rich derivatives volumes are growing fast and show no signs of slowing down. Those factors should drive earnings growth at derivatives exchanges for at least 12 more months.

“Inside Scoop” section reports that 3 investment firms have recently wrapped up purchases of shares of Chipotle Mexican Grill (CMG). In the past 2 weeks, Oz Mgmt, Deephaven Capital Mgmt and Atticus Capital have each disclosed stakes in Chipotle's class A or class B shares.

Color on quarter: Amazon.com (NASDAQ:AMZN)

Several firms are commenting on Amazon.com (NASDAQ:AMZN) after the co announced its Q3 earnings and issued guidance:

- Bear Stearns notes revenues of $2.31B (up 24.2% YoY) was ahead of their/Street estimates of $2.26 / $2.25B. Excluding FX, revenues grew 23.1% YoY. After normalizing for Harry Potter 6 and attachment sales in 3Q05, YoY growth approached 26% YoY, driven by outperformance in the international segment, which grew the top line by 28.5% YoY to $1.05B or 26%, excluding FX. Gross margin stood at 23.8%, ahead of firm's estimate of 23.0%. Pro Forma operating income was $72M, or 3.1% margin, ahead of their estimate of 2.8%. GAAP EPS was $0.05, ahead of firm/street estimates of $0.03.

Amazon increased full year revenue guidance, the midpoint of which implies accelerating revenue growth for 2006. However, the midpoint of the Pro Forma operating income guidance of $180M-$270M for 4Q06 was 4% below firm's expectations, implying that Amazon is anticipating higher than anticipated pressure on gross margins in the quarter, offset by the decline in the growth rate of technology and content costs. Maintains Outperform.

- Deutsche Banks maintains HOLD rating on shares of Amazon after the company in their view reported in-line to slightly better 3Q results (near the top-end of previously issued guidance). Sentiment on the stock was once again meaningfully negative heading into the quarter as investors fretted about margin contraction and slowing top-line growth. However the solid quarterly performance put these concerns to rest, thereby pushing shares up 15% in after-market the firm is encouraged by the upside delivered by Amazon, they think that the stock likely gives back the overnight gains (into the mid-$30s range). Considering that firm's views for 4Q & 2007 operating profitability remain largely unchanged (save for higher revs), they think that investors wait for incremental bottom-line upside to aggressively step up in the stock.

Spending on technology and content increased 44%Y/Y to $156mn, lower than their estimate of $160mn and a slower growth rate than previous quarters of 60%+. Firm highlights that technology spend as a percent of revenue decreased from 7.1% in the last quarter to 6.8% in this quarter suggesting that Amazon is beginning to leverage its substantial investment spend and that its reinvestment in the business is nearing completion.

However, sales & marketing spend did jump to $63mn in the quarter (2.7% of sales) and represented an acceleration in Y/Y growth to 50% (vs. 25-30% in previous quarters). Deutsche does not believe this is the start of a long-term trend. Given the substantial new product roll-outs, e.g. Prime, Unbox, Web services etc. Amazon has stepped up its efforts to market these products to consumers/businesses and raise awareness.

Firm's 4Q06 revenues are now $3.8bn (up from $3.70bn), representing 28% Y/Y growth. New proforma (cash-tax) adjusted EPS is $0.49 (vs. $0.50 previously). For 2007, they now expect revenues of $12.4bn and pro forma EPS of $1.24 vs. previous Rev/EPS estimate of $11.900/$1.24. Raise Price Target to $35 (from $31).

- Goldman Sachs notes that neither 3Q2006 results nor the updated outlook changes their long-term view on growth or valuation. Results continued to highlight increasing costs of
growth with stable 23% (ex FX) yoy revenue growth but a 34% yoy decline in operating income. A 50% yoy increase in marketing (2x eBay) leaves them to question the sustainability of revenue growth if and when Amazon tapers spending to expand margins. Firm has no meaningful estimate changes but are moving to a 12-month price target of $35 versus prior year-end 2006 price target of $30.

The stock will likely be strong in the near term due to short covering, a view that margins and ROIC have bottomed, and investors trading around the positive holiday season rhetoric through Thanksgiving. Several factors could make the gains short lived: 1) a realization that AMZN lowered the previous 4Q2006 margin outlook again; 2) margins post the seasonal expansion of 4Q will decline qoq in 1Q and will likely not improve enough in 2007 without a corresponding revenue slowdown to warrant a higher valuation; and 3) competitive and secular issues continue to increase.

Maintains Neutral.

Notablecalls: Deutsche called the fade in YHOO last week. I didn't think it would work but it did. Think they will be right about AMZN too. A 15% move is a bit excessive in case of AMZN. Especially if there are still legit concerns regarding margins. Shorting AMZN is likely a money-maker.

Tuesday, October 24, 2006

FTN Midwest Securities on HDD's

- People at FTN Midwest Securities have issued a nice summary on HDD names:

Firm notes that with six drive makers producing notebook drives, the segment continues to be one of the most dynamic and competitive segments of the HDD market.

Although demand is solid and notebook shipments are expected to be up 25-30% in 2006, notebook drive pricing has remained aggressive in 3Q. The desire by relatively new entrants STX and WDC to gain share and Asian incumbents, particularly Hitachi GST, to stem share losses has led to aggressive price declines.

Outside of the overall strength of the notebookmarket, the biggest takeaway from their perspective is WDC design wins and the likely share gains in 3Q and 4Q that go along with them.

With fundamentals improving entering the seasonally strong CY4Q and Seagate (NYSE:STX) shares trading at historically low levels (8x FTN's CY07E of $2.66), they believe this to be an attractive entry point for investors. Firm is maintaining their BUY rating on STX and $31 price target. They believe that STX will disproportionately benefit in the long term fromthe Maxtor acquisition as well as underlying growth in the utilization of hard drives. Longterm catalysts for growth are 1) a more stable pricing environment particularly in the enterprise and desktop segments, 2) increased scale via share gains, 3) product depth, and leading technology position. They also believe that downside is relatively limited at these levels. Using STX’s two year low sales multiple, they estimate that downside is limited to $17 (.81x FY07 sales estimate).

FTN is also bullish on Western Digital (NYSE:WDC) given share gains in the desktop segment and the significant strides it has made to close the technology gap with announced volume production of 160 GB per platter desktop drives and 80 GB per platter, PMR based, notebook drives. Firm believes that the long term positives with this story clearly outweigh the shorter term negatives and are maintaining BUY rating and $24 price target. WDCshares are currently trading at 8x CY07E of $2.01, a discount to its mean forward year multiple of 12x. Using WDC’s two year low sales multiple, they estimate that downside is limited to $11 (.48x FY07 sales estimate).

Although they like the risk reward proposition with HDD OEMs, the firm is less bullish on theircomponent suppliers who could feel the negative impacts of the excess inventories
accumulated throughout 2006 into the historically strong December quarter. Despite the recent sell off of Komag (NASDAQ:KOMG), they would remain on the sidelines as the draw down of excess drive inventories could potentially overlap with 2007 challenges including industry wide and company capacity additions, the loss of Maxtor’s enterprise business, and the potential negative impacts of adoption of 160 GB per platter and PMR. Additionally, share gains by Samsung whose media procurement model does not includeKOMG remains a concern.

They are also uncomfortable recommending Hutchinson Technology (NASDAQ:HTCH) at this point. Firm continues to be concerned that HTCH may lose share as STX transitions acquired revenue streams to its procurement model which they believe favors HTCH competitor Magnecomp. They also believe that new component reducing advances in technology including 160 GB and PMR could hurt HTCH if weakness with higher cap drives persists.

Overall, FTN's checks in Asia indicate that drive demand and sales were generally inlinewith expectations for the quarter. Unlike US and European distributors, Asia distributors continue to see excess inventories.

Channel pricing appears to be more aggressive in Asia than in the US or Europe. Expectations for 4Q remain positive with contacts having “good” visibility for October and November order. Solid but not robust PC demand was complemented by strong gaming console orders reinforcing our thesis that end market demand is not the major stumbling block for the HDD industry. Ongoing market share battles continue to be a cause for concern but contacts see improvements in inventory andpricing indicating that the worst should be over.

Notablecalls: Nice little summary for the investment types out there. None of this stuff is outright actionable but it sure does help with the overall picture. This is also about the first time I have highlighted FTN Midwest on this page. Welcome to the club, guys! Hope to see more of you here.

Calls of Note Part 4

- UBS thinks Sapient (NASDAQ:SAPE) could be viewed as a logical acquisition target because:: 1) SAPE now has an independent chairman, 2) business model attractiveness (high-end service offerings coupled with balanced onshore/offshore delivery model), 3) buyers could benefit from sizeable revenue & cost synergies (which would enhance the accretiveness of the acq), 4) attractive valuation, 5) an efficient path to creating shareholder value given SAPE's execution issues.

Firm analyzed SAPE from the perspective of both strategic and financial buyers. Their merger model suggests that at a 10% EV/EBITDA discount to peers (implied takeout price of $7.80/sh), SAPE would be EPS-accretive in yr 1 by anywhere from 0.3% for IBM to about 9% for CTSH & Capgemini. LBO model indicates potential IRR of 26% for financial buyers at $7/sh.

In firm's view, macro demand for SAPE's core consulting/SI services and onsite/offshore model remains strong, as evidenced by the co's recent pre-announcement of revs at or above the high end of guidance. To support their positive thesis (i.e., shares are undervalued on the basis of core earnings power), they will be looking to catch up with the new CEO/CFO on strategic priorities soon.

Maintains Buy and ups tgt to $8.50 from $8.

Notablecalls: I think this one is a pretty powerful call. I also like the fact they will catch up with the CEO/CFO as it means we will have at last one more positive note on SAPE in the coming weeks. Actionable call!

Calls of Note Part 3

- Banc of America notes Eagle Test Systems (NASDAQ:EGLT) shares have been under pressure recently anticipating weak analog commentary from TXN (55% of EGLT's June quarter sales) in light of pre- announcements/weak numbers from other analog players.

TXN's 3Q06 earnings call highlighted few positive comments: 1) company'scommentary implies most weakness expected in the December quarter is tied to wireless handset market (35% of September quarter sales), in turn suggesting relative stability initshigh performance analogbusiness(18% of September quarter sales), and 2) analog inventories remain under control. Management views analog as a growth segment and the firm estimates TXN's high performance analog market share at 21% and overall analog share at 15-16%.

EGLT supplies test solutions to TXN's high performance analog segment. Texas Instrument was their largest customer in FY2005, about 44% of sales. TXN has spent roughly 80% of their 2006 estimated cap-ex of $1.3B at the end of 3Q06.

Maintains Buy and $23 on EGLT.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 2

- UBS is lowering estimates for United Surgical Partners (NASDAQ:USPI) to reflect a more conservative outlook going into 3Q results. Firm's 3QE EPS now $0.28 vs. $0.31 previously, FY'06E $1.15 vs. $1.18 and FY'07E $1.40 vs. $1.55 prior. Revised estimates now include the sale of partial ownership interest in Surgis centers to NFP hospital partners and low-single-digit s.s. rev growth at consolidated facilities.

Firm expects USPI will use the 3Q results call to reset LT expectations for s.s. rev growth from 9-12% to a range that is more likely to be in the mid-single digits. They also expect the company may be somewhat conservative in setting 2007 EPS guidance given the potential for a sale of Surgis assets in the near future.

With stock trading at ~ 18x revised $1.40 FY'07 EPS estimate, which includes more conservative growth projections (low to mid single digit s.s. revs) and no accretion from capital reinvestment accretion (expect FCF of $100m in '07E), they believe the potential resetting of expectations should be viewed positively, especially with the stock down nearly 40% from highs earlier this year.

Maintains Neutral and $29 tgt.

Notablecalls: Expect USPI stock to experience weakness in the coming days. Not a high conviction short, though.

Calls of Note Part 1

- Bear Stearns comments on NVIDIA (NASDAQ:NVDA) after Mercury Research released 3Q chipset data on Monday. The key takeaway was NVIDIA's significant share gain, from 12% in 2Q to 17% in 3Q. In AMD chipsets, NVIDIA's share increased from 52% to 61%. NVIDIA also benefited from the overall strength in AMD chipsets, which increased 41% QoQ to 19.6M units, greater than AMD's MPU shipment growth of 18% QoQ to 14.8M units, likely due to Dell preparing for its AMD-based system ramp in 4Q. Overall, NVIDIA's chipset shipments increased 66% QoQ to 12.3M units (98% of which were AMD chipsets).

The data clearly shows that the AMD-ATI merger did not impact NVIDIA's chipset business in 3Q. Based on current design win activity, the firm believes there is unlikely to be any meaningful impact in the next two quarters as well. NVIDIA's share gain in AMD chipsets came at the expense of SIS and ATI, whose shares went from 9% to 3%, and 27% to 23%, respectively. Meanwhile, in the Intel chipset space, ATI's share declined significantly as expected, from 8% to 2%. ATI exiting the Intel chipset market clearly presents an opportunity for NVIDIA to ramp up its Intel chipset business next year.

They remain comfortable with their above-consensus estimates for NVIDIA. Firm reiterates their Outperform rating and $37 price target. Apart from the momentum in chipsets, which they believe is be here to stay and grow, they expect NVIDIA's competitive lead in desktop GPUs to continue into next year and in fact widen, as well as its share gain in notebook GPUs to continue next year. They also expect continued gross margin expansion in upcoming quarters.

Notablecalls: Not actionable but good to know category.

Color on quarter: Texas Instruments (NYSE:TXN)

Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued not-so-strong results and mixed guidance last night:

- Merrill Lynch notes Texas Instruments is a well-run company that is running out of margin leverage in an end market that is beginning to slow. It is a great company, but it has not been a money making investment for more than a year now. Firm expects the flat performance in the stock to continue.

The stock continues to be reasonably valued but no more, in firm's view. TI's status as default large-cap semiconductor holding, combined with the 17x earnings multiple, should keep the stock from going down, but they don't see where multiple expansion comes from. As the September quarter results illustrate, TI is operating at peak margins already.

Looking at the numbers, their 2007 GAAP earnings estimate settles at $1.89 on revenue growth of 10%. YoY operating earnings growth is 11%, but the per-share growth is higher as a result of TXN's continued aggressive stock buyback activity. Firm thinks consensus estimates may not be adequately factoring that in. They are initiating a 2008 earnings estimate of $2.20. Maintains Neutral.

- JP Morgan notes they believe guidance for 4Q06 is aggressive as book to bill was the
lowest in five years and the company is expecting higher turns than 3Q06. Firm also believes revenue and gross margins should decline again during 1Q07 as the inventory correction spills over in to 2007.

Notes they will consider upgrading TXN stock once they see evidence of a bottom in gross margins, which could happen during 1H07.

As a result, they are lowering C06 revenue estimate from $14.5 billion to $14.4 billion but raising C06 EPS estimate from $1.67 to $1.68 due to lower shares. Firm is also lowering C07 revenue and EPS estimates from $15.1 billion and $1.79 to $14.6 billion and $1.71.

TXN is trading at 3.4X its C06E sales, near the mid point of its historic range of 3.0 to 4.0 times sales. Firm is concerned on downside risk to estimates and therefore is reiterating Neutral rating.

- Goldman Sachs notes they remain cautious on TI's fundamentals and on the stock as inventory continues to plague the industry and believe another shoe could drop for TI, which would pressure its sales and margins. Firm prefer to recommend cyclical stocks like TI, when margins are nearing cyclical trough, allowing for operating leverage. While TI has done a good job improving its margin profile, they view current margins as being at their cyclical peak. Hence, the firm maintains SELL rating on the stock.

- Citigroup notes that TXN's guidance still leaves room for shortfall in analog revenues and corporate GM; mid-q update on 12/11/06 now a potential negative.

Handsets cited as concern, but the firm is not too worried given solid units at operators and OEMs. Analog not cited as a concern, but they ARE worried given -2% to -4% average decline cited by peer group.

Gross margin performing better than 4Q04, but downside exists to implied guidance given analog concerns and high inventories.

They anticipate near-term downside, in line with their cautious view stated on 10/09/06. But the firm continues to like TI on a long-term basis and notes that the inventory spike in 3Q04 marked a bottom in TXN. Would view any pullback as simply an enhanced buying opportunity. Maintains Buy and $36 tgt.

TI pointed to handsets as the main culprit behind its weak guidance. Specifically, inventory build at NTT Docomo, exacerbated by application processor share incursion by Renesas, is driving the weakness. Europe and North America were also cited as being sub-seasonal.

Recent results from handset vendors (Motorola and Nokia, as well as US operator Cingular) do not point to end-demand issues. We conclude therefore that TI is suffering mainly from inventory and share issues. Based on current information, significant uncertainty about TI's near-term outcomes in handsets persists.

Longer-term, the firm has concerns about the negative impact of Renesas' incursion into TI's share. However, we note that with TI's superior market share in 3G to date, they would have to lose 30% share at NTT Docomo to Renesas in order to grow below industry growth rates.

Notablecalls: Dose of reality from TI! Expect the shares to move lower in the coming months.


The WSJ’s „Tracking the Numbers” column discusses Berkshire Hathaway (BRKA), saying that at $100,000 the shares of the co could be the cheapest most-expensive stock around. Despite its high price, some analysts say Berkshire, which now owns some 50 businesses ranging from underwear maker Fruit of the Loom to auto insurer Geico, has room to climb. "It's a 75-cent dollar right now," says Justin Fuller, of Morningstar, meaning it is about 25% undervalued. Mr. Fuller values the stock around $129,000 a share. The stock trades at a relatively inexpensive 1.6x its book value.

“Heard on the Street” column discusses banks with sizable exposure to Las Vegas. With the economy showing signs of slowing, investors may think the best play is to toss away shares of regional banks, including Zions Bancorp (ZION) and Western Alliance (WAL). Investors may win with that play in the short run, but they could lose a pretty big pot by failing to hold on to what they have for the long term. Brad Milsaps, of Sandler O'Neill, said a slowdown in home building in the Las Vegas metropolitan area will have a ripple effect on the 42 banks operating there. "In the near term you definitely have pressure," Mr. Milsaps said. But Mr. Milsaps can't ignore the gambling capital's long-term growth prospects, which he says should bode well for banks. "If there are problems in Vegas for one bank, the unfortunate thing is the perception may be that other banks in the mkt have problems as well," he said. "That may or may not be the case."

Barron’s “Inside Scoop” section reports that two directors at Western Alliance (WAL) have raised their stakes. In transactions on Oct. 19 and 20, directors William S. Boyd and M. Nafees Nagy bought a total of 79K Western Alliance shares for $2.6m. Boyd, who was the founder of Bank of Nevada, made the bulk of the purchases, shelling out $2.4m. The latest buys bring Boyd's total holdings in the co to 734K shares, or 3.2%. His daughter, Marianne Boyd Johnson, who is also a director, holds 4.6m shares, or about a 20.3% stake.

Monday, October 23, 2006

Calls of Note Part 6

- Ryan Beck & Co comments on American Science & Engineering (NASDAQ:ASEI) after GovExec.com reported that the Congress allocated about $50 million to the U.S. Agency for International Development (USAID) to provide security systems to scan commercial cargo leaving and entering the West Bank and the Gaza Strip. The article describes the selection of Chemonics International, a private consulting firm with close government ties that is involved in projects in a substantial number of countries to improve economic conditions and living standards.

The firm has spoken to representatives of ASEI and Chemonics but were unable to confirm a contract award as of Friday.

Apparently, Chemonics solicited and received proposals from a number of suppliers and, according to the article, has selected equipment from ASEI and Nuctech, ASEI's partner in China under an agreement where ASEI supplies Z Backscatter modules for installation on Chinese-built vehicle chassis.

On the other front, the U.S. Air Force has begun the process that we think should lead to an order for an OmniView Gantry System for installation at Charleston Air Force Base in South Carolina. This would likely be identical to those ordered recently for use at the Port of Charleston and for the King's Bay Ballistic Missile Submarine Base in Georgia.

Firm is not revising forecasts at this time; however, based on recent disclosure of 240 Z Backscatter systems deployed, they think that F07 is shaping up as a very solid year from a financial point of view. Reiterates Outperform rating and 12-month price target of $72 per

Notablecalls: I like this call. I think it's actionable.

Calls of Note Part 5

- Bear Stearns notes they view Noble's (NYSE:NE) achievements in cost management in the third quarter as a differentiating factor compared to many other offshore drillers.

The company had previously sailed through the second quarter with less unexpected downtime and shipyard delays than most of its peers, and it continued to keep contract drilling expenses in check in 3Q06.

Due in part to contract provisions requiring operators to pay for certain instances of downtime, the company is also expecting to benefit from a reduction in unpaid shipyard days (projected to decline by 29% in 2006 and by approximately 25% in 2007). Firm is raising their 2006 EPS estimate to $5.28 from $4.95 mainly to reflect reduced 4Q06 cost expectations. They maintain their 2007 EPS estimate at $9.65 and are introducing 2008 EPS estimate at $13.50.

They continue to rate Noble Outperform with a 2007 year-end price target of $95. While a leveraged buyout is unlikely for now, the fact that NE is undervalued (at 7.1x estimated 2007 EPS and 5.1x estimated 2008 EPS) is hard to deny.

Noble's strategy of reducing its shallow water Gulf of Mexico exposure and increasing its
deepwater drilling focus has positioned the company to maximize its earnings potential in the current business cycle. On a 2007 EV/EBITDA basis, Noble trades at a 5.1x multiple, a discount to Transocean's 6.6x multiple and in line with Diamond Offshore's 4.5x and GlobalSantaFe's 5.2x.

Notablecalls: Expect to see some buy interest in NE today.

Calls of Note Part 4

- Citigroup Semiconductor Equipment team notes that most investors remain focused on "how long will it last" rather than "how bad will it get". While this process has begun in the back-end (TER's orders -41% Q/Q), it simply has yet to occur in the front-end and must for the firm to be more positive . This week's sensitivity analysis suggests front-end tool orders have downside of ~45% over the next several Qs. This is based on a top-down assumption that chip units decline ~12% from current levels as inventory clears the channel - more comparable to C1997-1998 than C2004 which they feel was more of a mid-cycle correction in the middle of what has been a ~4 year long upturn.

Among those reporting thus far, chip inventory is up ~38% Y/Y (13% ex INTC). Because Y/Y
variations in chip inventory typically lag changes in chip production levels by ~6mos, the firm would expect at least two more Qs of significant Y/Y inventory build (through CQ1:07) since factory production cuts began only recently. Remains cautious on group, KLAC top idea.

Notablecalls: I continue to be very cautious regarding the Semi space. Not actionable but good to know category.

Calls of Note Part 3

- Merrill Lynch is upgrading Garmin (NASDAQ:GRMN) to Buy from Neutral with a tgt of $60. Firm believes the personal navigation devices (PND) market remains robust and Garmin will retain its dominant market position through at least 2008.

New players must gain shelf space at the large retailers, but given lead time requirements, retailers have largely chosen their products for the holiday season and in our opinion, the SKUs will lean toward Garmin products. Most introduced products, with the exception of TomTom, lack the functionality and form factor to compete with Garmin's products. It is firm's opinion that the market, as well as Garmin's competition, underestimate the difficulty in creating a product that translates the mapping data into an accurate, user-friendly format.

They agree with the rest of the Street and investors that margins will decline; however, where we differ is the pace of margin deterioration. In avionics, Garmin is the low-cost disruptor and will be a significant player (threat) to incumbent players. Firm expects Garmin to achieve FAA Part 25 certification in the next two to three years and take a meaningful position on larger business jets in the future.

Firm is raising their 2006 EPS forecast to $2.05 from $1.89, which is above management's revised forecast of "to exceed $1.95" (post-split). They are also raising 2007 EPS forecast to $2.50 from $2.25, which is significantly above current consensus of $2.29.

Notablecalls: Are you convinced by this call? Can't say I am. GRMN has a history of selling off after gapping up. Would keep a close eye on the stock above the $51 level in order to spot cracks in buy interest.


The WSJ reprots that Cisco (CSCO) is entering the video-conferencing mkt with a high-end system that continues the co's push beyond networking equipment. Listed co’s with competing products include H-P (HPQ) and Polycom (PLCM). Only 10-15% of Cisco's customers have the necessary communication infrastructure in place now, said Cisco VP Marthin DeBeer. Customers may have to buy extra capacity from their service providers to use the systems, he said. Lee Doyle, of IDC, estd that fewer than 100 of the new-wave telepresence systems have been installed world-wide. Elliot Gold, of TeleSpan, added that co’s can adopt less-sophisticated forms of video conferencing for as little as $7K, putting the Cisco system into a narrow niche. "I don't see it being a big seller," Mr. Gold said. One alternative to installing systems in-house would be for execs to use services that install and rent time on the Cisco hardware, said David Willis, of Gartner.

Notablecalls: Last Week Barron’s suggested that Cisco could eat Polycom (PLCM) and Radvision (RVSN) mkt share. See here.

“Heard on the Street” column discusses Goodyear (GT) saying that so far the co’s massive strike hasn't punctured its stock. Goodyear's stock is being bolstered by 2 things: The belief by investors that Goodyear's unionized workers will be forced to make big concessions, as has happened in other labor battles recently, from the airlines to auto parts. And signs that the tire business in general is poised for a boost from falling oil prices. "I think most of us expect mgmt will be able to reach a satisfactory arrangement with labor that will include lower costs and improved productivity," says George Putnam III, of New Generation Advisers. "This may be just a necessary step in the restructuring of the US operations," Mr. Putnam adds. "We don't set targets, but I'd hope to see the stock in the low 20s at least over the next year or so." Mr. Putnam also doesn't expect the strike to last long.

The NY Post has learned that in a bid to out-cool Apple (AAPL), Microsoft (MSFT) approached the ultra-snarky Pitchfork blog about supplying content to its Zune digital music player, but was rebuffed by the music hipster haven. The talks with Pitchfork were aimed at both giving Microsoft some indie credibility and taking advantage of the Zune's wifi capabilities by allowing users to zap reviews and other site content to each other, sources said. Unfortunately for Microsoft, Pitchfork didn't bite. "They asked us about generating new content with them or creating a new section on our site specifically for Zune visitors, but it wasn't something we were interested in pursuing," Pitchfork Editor-in-Chief Ryan Schreiber told The Post.

Calls of Note Part 2

- UBS believes Hewlett-Packard (NYSE:HPQ) is set to outline new operating margin targets in the 9% range at its Dec. 12th analyst meeting in NY. As a result, the firm believes investor psychology will start moving toward a $3.00 EPS figure for calendar 08, which they believe could drive shares through the mid $40's applying a 15-17x multiple (in line with the market/modest premium).

Checks suggest HP momentum continues in PCs, printers & in the enterprise, making operating margin targets of 7.5-8.0% look too conservative for FY07. They believe HP will update those targets on its 4Q06 earnings call, perhaps making firm's FY07 estimate of $2.50 look conservative.

For FY07 their estimate of $2.50 is based on 6% revenue growth to $96.4B & operating margin of 8.6% (factors in the Mercury Interactive acquisition). Given firm's view that margins can top 9% long-term & revenue should continue to grow in the mid-single digits, they are initiating an FY08 estimate of $2.85 based on 5% growth to $100.8B & operating margin of 9.1%.

UBS is adjusting their price target to $50 (was $44) still based on 17-18x forward EPS but now based on new FY08 estimate of $2.85. They believe that HP's faster growth & higher margins warrant a premium to Dell.

Notablecalls: Interesting call from UBS. I'd keep this one on a tight leash (stop) and watch the volume. Lately, I was seen several high profile calls like this one fail miserably in the s-t. If the vol jumps and there is no move in the price, get out fast or even take the other side of the trade.

Calls of Note Part 1

- Morgan Stanley comments on Amgen (NASDAQ:AMGN) saying CMS may change reimbursement for "bundled" drugs as soon as November 1st in an effort to target Amgen's practice of tying price on Neulasta to Aranesp volume. Amgen's ability to offer discounts on Neulasta while maintaining Aranesp reimbursement (average sales price or ASP has been constant) has been key to the company's rapid share gains from J&J's Procrit (a superior dosing profile is also important). Firm suspects that CMS is most likely to issue guidance to unbundle these drugs, but that this guidance will be open for public comments before implementation, meaning there will be no impact until 2008 (but creating an additional overhang on Amgen's highly profitable erythropoietin business).

Currently, this issue is likely not on most investor radar screens, but Amgen faces risk both in the courts (J&J is suing for violating anti-trust laws) and at CMS. However, as the CERA trial nears and the focus on competitive threats to the anemia franchise intensifies, bundling and ASP have the potential to become another overhang on the business. Furthermore, loss of bundling leverage could slow the Vectibix launch versus ImClone's Erbitux.

Firm maintaint their Equal-weight rating and $72 tgt.

Notablecalls: That's certainly not good news. Neulasta and Aranesp are both important high margin drugs for AMGN and negative changes there will hurt the bottom line. The chart however looks like the stock in on the road to recovery (AMGN has fought several overhangs over the past 18 months) so I would not overstay my welcome on the short side. Sometimes charts top fundamentals. This may be an example of that.

Sunday, October 22, 2006

Barron's Summary

Barron’s discusses Jones Apparel (JNY), whose shares trades at $33 a share, or 13 times 2007 estimates. If the company beats earnings forecasts in coming quarters, the multiple could expand and its shares could rally toward 40.

According to the Barron’s, well-run and with excellent footholds in several electronics-testing markets, Agilent (A) is worth a look. Its shares should rise 15% over the next year.

At a current stock price of $39, Barnes & Noble's (BKS) valuation compares favorably with that of recent retailer buyouts. Shareholders would likely reap at least a 25% premium.

A trade idea highlighted in „The Trader” column: The quantitative and derivatives strategists at Credit Suisse took note last week of the severe outperformance of software vs semiconductors in the past 9 months. The Software HOLDERS (SWH) has outperformed the Semiconductor HOLDERS (SMH) by 25 percentage points since spring. In the past 5 years, these ETFs have had an 80% correlation, but with wide swings in relative performance over shorter periods. The CS researchers were recommending buying the SMH and shorting the SWH to play a reversion to the sectors' average relationship over the next 8-12 months. These swings can always go farther than expected, but the current divergence is nearing extremes hit only twice in the past 5 years, after which it reversed dramatically.

„The Trader” column also highlights Integrated Device Technology (IDTI), which recently acquired ICS. The stock has thrived as earnings momentum surged and it digested the ICS merger, trading at 14.81 on Fri. The stock today looks at least as attractive as it did last Nov. Back then, its earnings for the MarFY were expected to be around 71c a share; the present forecast is for $1.03, and at least one large investor in IDT thinks the Street-high est of $1.20 is more likely, with upside from there into the following FY. If so, the shares are rather inexpensive, at 12x F’07 earnings. One of the major expected benefits of the ICS merger was the ability to push ICS' chip production through IDT's spare plants. Those dividends have yet to kick in fully, say IDT bulls.

“Technology Trader” column discusses Nokia (NOK) and Motorola (MOT). For 4 years, Nokia repeatedly has missed the latest trends in cellphone designs, first clamshells, now thinness. But the co with the most cutting-edge phones might not have the most upside. Nonetheless, it has hung on to its dominant 36% global phone-mkt share. Nokia's long-term financial outlook is brighter. Next year the co's net is expected to rise about 18%, vs 15% at Motorola. Moto's thin phones didn't help the co's profitability in the 3Q. "What's important to shareholders is having a reasonable operating profit, and that's what Nokia has focused on," says Albert Lin, of AmTech. He has a Buy rating on Nokia and thinks it could hit $25. Moto is rated Hold.

Fund holdings highlighted: GE, MSFT, PFE, HBC, AMGN, SNY, TRI, NZT, BUD and AMP.

Friday, October 20, 2006

Calls of Note Part 2

Prudential taking a look at the valuation of Phelps Dodge (NYSE:PD). Firm values PD at $182 in liquidation as $10 for free cash, $135 for operations and $37 for exploration and development. The $135 equates to 6x 2007E of $22.48 at $3.00 copper and $20 spot moly or 9x 2009E of $14.77 at $2.00 copper and $8 spot moly. PD would earn $28.23 in 2007 and $33.64 in 2009 if today's $3.50 copper and $27 per pound spot moly prevailed in those years.

Firm value PD's stake in Tenke Fungurume at $25 per share, Kisanfu copper-cobalt also in Congo at $5 and the other eleven exploration properties on slide 73 of the 3-16-06 webcast at $7.

Plausible buyers "outside the radar" might include Norilsk Nickel (produces 2.5% of world copper), Rusal, Severstal, Lakshmi Mittal personnally or metal trader Glencore as a white knight.

Firm expects a strategic buyer to pay fullest value, not an LBO type relying on debt, as the copper market does not appear liquid enough to hedge out a $20+ billion transaction nor exploration efforts.

Notablecalls: So the <$100 stock is worth $182 today? We are going to see additional $2-$4 pt upside today in addition to $20 pt move in the past weeks. Actionable call!

Calls of Note Part 1

Citigroup calling UnitedHealth (NYSE:UNH) their new top pick with 60% 12-mo upside. Firm's opinion is that strong forecast future EPS growth present an opportunity to invest in a best-of-breed company at a peer group multiple that is depressed. With the options investigation complete, they expect investors to shift focus back to fundumentals. UNH is the best positioned MCO in key product areas, namely CDHP and seniors market.

UNH results confirm moderate cost trends with co. now expecting total medical costs at 7%-7.5% for the year. Favorable trend due to lower utilization of medical services. For 2007, UNH is pricing to 7%-8% even though cost trend is decelerating, leaving room for upside to guidance.

United exceeded Street expectations, reporting $0.79 EPS, +30% y-y. Company reiterated 15% EPS growth for 2007 off new 2006 guidance of $2.95-$2.97. Firm raising their 2006 EPS to $2.97 and maintain 2007-2009 EPS of EPS $3.45, $4.05 and $4.70, respectively.

Maintains Buy and $81 price tgt.

Notablecalls: The stock made its move yesterday. However, positive comments from Citi (and other firms) should drive some upside today too.

Color on quarter: SanDisk (NASDAQ:SNDK)

Mixed opinions on SanDisk (NASDAQ:SNDK) following results.

- Citigroup downgrading SNDK to Hold from Buy as the catalysts are not emerging as expected. While the headline numbers were positive, important details raised concerns. Pricing -25% vs. firm's -18%, gross margins 260 bps below their est., op income missed their est. by $2M despite $8M of royalty upside, and interest income added $0.03 not in their model.

Firm expects estimate revision trends, an important catalyst, to go against their expectation. A more cautious stance on 4Q06 and 1Q07 pricing and margins results in lower 4Q06E and 2007E EPS. Firm expects Street EPS to decline modestly as well.

Lower estimates yield a lower target price and less upside. Firm reduces their 2007E EPS to $2.84 from $2.97 and price target to $66 on unchanged multiples.

- Goldman offering explanation to their $46 price tgt: (1) a 25X multiple applied to 2007E product EPS of ~$0.80, and (2) their estimate of the present value of royalties of ~$25/share, assuming SanDisk is able to add licensees and thus grow royalties at ~5% in perpetuity. Given rich valuation and their expectation of weaker pricing heading into earnings, firm says they should have downgraded the stock. However, the sell off post the results will reduce potential downside. This, coupled with the volatility of the stock, makes them hesitant to downgrade now. However, firm would not buy the stock on a pullback as they see weak supply/demand dynamics in 2007 given significant incremental supply and less potential incremental demand. Further, they believe SanDisk's comment that NAND is less profitable than DRAM, as well as similar commentary from Samsung, Novellus, ASML and Micron, should cause investors to question their bullish SPE view.

- UBS offering very contrary view, shaking their heads in disbelief about the stock's sell-off in the afterhours.

Firm views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook, and are raising their sales est to $980M (from $939M), and pro forma EPS estimate to $0.81 (from $0.78). Excluding an unexpected jump in SG&A for marketing and promotions to around $93M (prior est $69.5M), their new EPS est would have been $0.89.

Firm believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, firm is seeing rivals struggle, divert capacity, and in some cases quit the market.

Notablecalls: Look, NAND is taking the same way that DRAM has used to take for quite some time - oversupply & pricing pressure. Tough to like the stock in a situation like this. That said, SNDK is a bouncer and that's what I think the stock will do today too.