Thursday, November 30, 2006

- Susquehanna Financial notes their recent checks suggest that several North American IDMs have started to sharply reduce wafer starts. This is unsurprising given firm's analysis of industry fundamentals, which suggests that IC unit production is likely to dip from current above-trend levels to more normalized levels over the next several months. They see these as caution signals for semiconductor stocks generally, and continue to see at least 10-15% downside risk to the SOX.

Only two semi industry downturns in the last 30 years have been driven by a drop in demand (defined as multi-quarter negative IC unit growth). However, after more than a year above trendline, we are almost certain to see at least a dip in unit production over the next several quarters. In a worst-case scenario, we could see a drop significantly below the long-term trendline - the last time this happened was in 2001, after IC units had spent the prior 20 months above trendline. IC units have been above trendline for 14 months.

While the firm remains impressed with Texas Instrument's (NYSE:TXN) execution and strong product cycles in 3G and high-performance analog, their checks suggest that the chipmaker is cutting wafer starts at its internal manufacturing facilities, as well as with foundry partners due to worse than anticipated demand from at least one major handset customer, as well as generally slowing analog unit growth. Firm would not be surprised if management takes F4Q06 (December) guidance to the low end of the previous range ($3.46 bln-$3.75 bln/$0.40-$0.47) during the mid-quarter update on December 11.Recommends that investors consider getting more constructive if valuation dips below 16x P/E NTM - the stock currently trades at 17.2x CY07 EPS estimate of $1.70. Negative Factor

Firm is also cautious on AMD (NYSE:AMD).

Notablecalls: Not actionable but good to know category.

Calls of Note Part 2

- Banc of America notes they are shifting their stance on homebuilders to neutral from cautious as they are seeing improvement in traffic, affordability, and construction - it was deterioration in these factors that led them to become more cautious in '05. Firm does not expect a smooth upward move, but expect choppiness over the next 12-24 months based on the excess inventory, as it will take time to work through the oversupply. They raising Standard Pacific (NYSE:SPF) to Buy from Sell and Meritage Homes (NYSE:MTH), NVR (NYSE:NVR), Pulte (NYSE:PHM), Ryland (NYSE:RYL), and Toll (NYSE:TOL) to Neutral from Sell.

BAC's Monthly Survey of Real Estate Agents shows improved buyer traffic in 33 out of 39 markets in November relative to October, although traffic is still below the expectations of agents in 38 of the 39 markets. They view traffic as the leading indicator of sales and pricing. Lower mortgage rates, price declines, and higher incomes are helping to ease strained affordability. Firm expects affordability to continue to improve over the coming year.

Tough times ahead for subcontractors; a positive for builders. Homebuilders have shown more discipline, with permits off 32% yr/yr in Oct. Expects continued discipline, which should help inventories and ease construction costs.

A seasonal increase in inventories in the Spring could lead to further pressure on prices and additional cancellations. Higher long-term interest rates would also likely lead to additional weakness.

Firm expects the stocks to trade in a range over the next 3- 6months.

Notablecalls: Historically, housing downturns have lasted between 26 and 52 months with new home unit sales averaging around a 50% decline. Even in best case, we're not there yet. And I'm strongly inclined to believe we are not heading towards the best of outcomes.

Calls of Note Part 1

- Bear Stearns notes that after meeting with CEO Francis Lee and CFO Russ Knittel, they came away reassured about Synaptics' (NASDAQ:SYNA) growth prospects. As expected, SYNA did not comment on its relationship with AAPL, althouh the firm continues to believe that SYNA has won back some AAPL business. SYNA continues to execute on growing its core notebook business, at the same time, making solid progress in expanding into adjacent market (e.g., has 9 mobile phone wins).

While SYNA did not update its financial outlook, it noted that demand for notebook PCs remains strong, with its dollar content per notebook expected to increase with inclusion of additional touch solutions (LightTouch, Dual Mode) beyond touchpads (~10% of notebook shipped in 1Q07 includedmultiple touch solutions). SYNA also expressed optimism regarding seasonal recovery in MP3 players. As an aside, SYNA noted that it does not expect MSFT Vista delay to have an impact on notebook demand.

While SYNA did not comment on its relationship with AAPL, it noted increasing design activities in MP3 players and mobile phones. In particular, SYNA highlighted growing interest by mobile phone vendors in its user interface solution like Onyx, as input requirements in mobile phones continue to increase owing to incorporation of multimedia features. In addition, SYNA continues to expand into adjacent markets (e.g., mouse/keyboards, remote controls, etc.).

Maintains estimates, Outperform rating and $33 tgt.

Notablecalls: Not actionable but good to know category.

Color on quarter: Synopsys (NASDAQ:SNPS)

As Synopsys (NASDAQ:SNPS) was the only real mover in after hrs trading, I thouhgt to highlight some of the analyst commentary on it this AM:

- JP Morgan notes that although Q406 results were impressive, they continue to rate SNPS shares at a neutral as they await a better entry point to own the stock. At $26 per share after hours, stock is trading at 14x FY 2007 free cash flow, which is at a slight discount to CDNS, and near what they believe is fair value for software companies in this segment.

The firm believes this is the best metric to value stock given its ratable revenue recognition model. Two other factors keep them neutral on the stock as well. First, there have been some rumblings in the semiconductor industry about a possible slowdown as we enter FY 2007, which they believe could impact RandD spending, and adversely affect EDA. Second, backlog in 2006 grew about 5% yoy to $2B while revenue guidance for FY07 is 9% at the mid-point of guidance and company expects Book-to-bill to be greater than 1.0 for the year implying acceleration in orders (bookings) in a year that could get off to a tough start.

- RBC Capital notes the company reported expenses at the low end of the guidance and cited strong progress with its expense reduction initiatives. Lower expenses combined with some slight revenue upside drove the two cents upside. Further, the company provided strong guidance for January Q1: Revenues between $292M-$300M and pro-forma EPS guidance of $0.26- $0.28. The company is benefiting from an extra week in the quarter along with a lower tax rate in FY 2007 (28-29%), however, the main driver of the upside for January is flattish expenses on rising revenues.

The firm is increasing their FY2007 pro- forma EPS estimate from $1.10 to $1.30. About $0.04 is due to the lower tax rate and the remainder is slightly higher revenues and lower expenses. They believe that the company was too conservative last quarter and is now being slightly aggressive with its guidance.

Tgt goes to $26 from $23 with the firm not recommending chasing the stock at its current price
level, as the company does have to deliver on what they consider to be slightly aggressive guidance. Recommends buying on pullbacks.

Notablecalls: Can't say I'm too familiar with the name but judging from analyst commentary and the trading dynamics (the stock had a big run yesterday on top of strong performance since July) I'd be looking for a fading oppy. More aggressive accounts may see opportunity above the $26 level. The EDA cycle is closely tied to the overall Semi cycle and longer term readers already know my views on the latter.


According to the Barron’s Online, the basket of apparel stocks tracked by Thomson Financial has been on a roll, jumping 21% over the last 4 months. But since closing at a 5-year high on Nov. 15, the index has dropped 6%. And that may be as good as it gets for Coldwater Creek (CWTR), Claire’s Stores (CLE), AnnTaylor (ANN), Aeropostale (ARO) and other highflying apparel retail stocks. Though pulling back from recent highs, the sector continues to trade at sizable premiums to the broader mkt, reflecting big expectations. But given challenges facing retailers this Christmas and mixed economic indicators, many stocks remain ahead of themselves. "It is not surprising that these stocks are a bit squishy right now," says Bill McVail, retail industry analyst and small-cap portfolio manager at Turner Investment Partners. "We won't know until January how the co’s performed. Add to that the run-up in these stocks, and it's no shock there's been some profit-taking."

“Inside Scoop” section reports that shares of Casual Male (CMRG) are currently trading near a 12-year high, but SAC Capital has loosened its belt and gobbled up nearly 1.3m shares of the co since the end of the third quarter.


Wednesday, November 29, 2006

Calls of Note Part 5

- Merrill Lynch notes SanDisk's (NASDAQ:SNDK) stock has been slipping since Q3 results mainly due to worries about oversupply in the NAND flash market. From a short-term trading standpoint, they think the stock could weaken further as the market continues to digest substantial new supply that is not being offset by any new killer applications. Firm's checks suggest that flash memory demand for the holiday season so far has been seasonally normal, but no more.

Despite their negative bias for the near term, firm's long-term view remains neutral. Certain suppliers, most notably Samsung, have begun to ease their capital spending on the NAND market, which should help alleviate the oversupply situation by the second half of 2007. Firm has trimmed their industry bit growth assumption as a result. Notes that their adjusted EPS estimate for 2007 of $2.50 remains below consensus estimate of $2.77.

From a valuation standpoint, the stock is trading at 18x prospective earnings, which does not look expensive based on the historical trading range (15x to 25x). However, given firm's belief that we are heading into further pricing weakness during the next few quarters, we think a more conservative multiple is warranted. The stock is trading between the normalized fair value ($53) and trough-cycle fair value ($35) based on long term returns model, suggesting
the stock is fairly valued.

Maintains Neutral.

Notablecalls: Expect to see some weakness in SNDK.

Calls of Note Part 4

- Piper Jaffray is somewhat cautious on Amylin Pharma (NASDAQ:AMLN) in the s-t saying that with 7 weeks of Rx data available for 4Q, they are lowering their Byetta sales estimate for 4Q from $147m to $135m. Street consensus for 4Q was $148m, with only 1 of 20 analysts below $140m in 4Q sales.

The most important contribution to firm's estimate revision today is the magnitude of the live sample program (distribution of free 5 ug pens) restarted in late September. Relative to initial projections, they may have underestimated this effect and, while they have focused on the long-term potential for these live samples to stimulate future revenue growth as they convert to revenue-generating 10 ug refills, they may have overlooked the effect of the lost revenue from these pens on 4Q sales. Other Factors To Consider: Channel Fill, Gross-To-Net Adjustments And Holidays.

While the firm acknowledges that the current Byetta run-rate for 4Q will likely fall short of prior estimate, they remain convinced that this is not related to the recent launch of Merck's Januvia, a central bear argument raised against AMLN.

Firm would use any short-term weakness in the stock on revisions to consensus numbers as a buying opportunity.

Notablecalls: Expect to see weakness in AMLN today. Think they are giving the 5ug pens away for no reason or bc they expect to see competition from Januvia. Or are they already seeing weakness after stuffing the channel?

Calls of Note Part 3

- FBR notes Pharmion (NASDAQ:PHRM) joins CELG as a biotech Top Pick on the FBR Top Picks list. Firm thinks PHRM should be trading at $32 in the next 12 months, implying 37% appreciation potential. They reach their $32 target by multiplying 2010 EPS estimate of $1.61 by a multiple of 30x and discounting at 20%. Firm's 2010 EPS assumes revenue of $482M, but there could be upside to this number; the company recently guided for revenues to range from $600M to $825M in 2010.

Drivers for outperformance include: further evidence from monthly data that Vidaza can survive - and even grow " with Dacogen now on the market, key presentations at ASH that position Vidaza for further growth, and 1H07 filings in Europe on thalidomide (calling attention to the possibility that approval could double sales from its current run rate of $76 million) and satraplatin in prostate cancer.

Notablecalls: Expect to see some mild buy interest following the call.

Calls of Note Part 2

- Thomas Weisel Partners notes that with Coinstar (NASDAQ:CSTR) up sharply, they revisited the story to see if the move was justified.

Coinstar is coming out of a period of heavy investment and appears poised for an earnings breakout. Firm's analysis suggests a two- to three-year earnings growth rate in excess of 20% if opportunities unfold as expected and they get to run-rate EPS estimate of better than $1.45 in the 2008-2009 time frame. However, their initial 2007 estimates failed to encompass management's strategy to return a portion of growth to retail partners.

Although 2007E revenue of $615mn is intact, the firm is scaling back EBITDA from $138mn to $126mn and EPS from $1.26 to $0.99. Management typically shares half of the upside it generates with retail partners and TWP had not initially factored that into their model.

With the stock up 41% since August 1, versus a gain for the Nasdaq of 16%, investors appear to have taken notice of the potential earnings breakout. If one assumes that everything unfolds as expected, Coinstar should reach EBITDA of $160mn sometime in 2009. Assuming a multiple of 8.5x, one gets to a value for the stock of $44 per share. If we discount that back at a required rate of return of 15%, one gets to a current fair value of $32 per share. They like the growth story, but would prefer an entry point below $32 per share. Maintains Mkt Weight.

Notablecalls: The stock has had quite a run and I would not be surprised to see it pull back some more over the next couple of days. Not a high conviction call.

Calls of Note Part 1

- RBC Capital's Mark Sue is back commenting on 3Com (NASDAQ:COMS) following news the co will pay $882M to wrap up the remaining 49% of the Huawei-JV (near the high-end of firm's range of $750-$900M). 3com will be left with only $32M in net-cash or $0.08-per/share, an uncomfortable amount considering that 3Com is operating in a net loss.

3Com will need some financing and the uncertainty of the amount and structure may weigh on the shares. Considering RBC's view that 3Com may not be investment grade, they think 3Com will choose a convertible note due in 2011. 3Com may raise up to $500M and the notes may pay interest seminually at a rate of 1% per annum. Firm expects a call spread convert deal with some proceeds ear marked for a potential share buyback.

The JV has been successful from a top-line growth perspective but 3Com will need to provide incentives to key managers in order to sustain the +50% YoY top-line growth. It's a positive that the deal will wrap-up and it does provide some closure but the business uncertainty is now replaced by financing uncertainty and increased execution risk.

So what's this thing worth? Considering the revenue base of almost $850M in CY07 for the JV, 3Com's potential 100% ownership combined with 3Com's estimated base-business of $650M and the remaining cash balance, they believe 3Com's shares may be fully valued at $5.50. With that being said the firm thinks an entry point near $3.50-$4.00 may make it worthwhile for equity-investors looking for some year-end beta. Maintains Sector Perform rating.

Notablecalls: As I suspected, Mark was indeed calling for a fall in COMS' stock price on Nov 6 (check the archives) and it worked out that way. Nice call. For those hoping for a quick bounce, check out the comments on the likely upcoming convert deal. That may limit the upside.

Color on news: Pfizer (NYSE:PFE)

Analysts are somewhat devided on what to think about Pfizer's (NYSE:PFE) U.S. sales force cut announced yesterday:

- Prudential notes that over the last few weeks it has been postulated that a sizeable sales force
reduction was in the works at PFE. Firm's understanding is that PFE has about 9,000 reps in the U.S. - a 20% reduction equates to 1,800 reps. Assuming $200K/rep in annual compensation and benefits, PFE stands to save about $360M in SG&A expenses annually.

As a highly profitable industry, the firm has generally felt that drug companies' organizational structures have ballooned over the past several decades, and only in rare circumstances have they had to push through heavy cost reductions. This suggests that PFE - and most of its peers - probably have additional room to cut, but this is likely to be a gradual process of trial and error.

Cost cutting is good, but to the firm the better way to "win" as a drug company is to have a solid pipeline of new drugs in development. PFE spends over $7B a year on R&D which suggests that, at some point, the company will likely have more to brag about. Whether this Thursday's analyst meeting will provide that opportunity is unclear. Maintains Overweight and $30 tgt.

- Morgan Stanley notes PFE announced plans to eliminate 20% of its U.S. sales force, or approximately 2,200 positions as part of its overall goal to achieve a more agile and slimmed down cost structure. The plan does not affect the approximate 20,000 reps outside the U.S. but the firm would expect management to look for opportunities to pare down in the international territories as well.

While great news, the level of savings from this plan of approximately $330 million (or EPS of $0.03) is likely just one step in a series of cost reduction programs that will enable the company to lower its cost base in 2007 and 2008 and hit its high single digit EPS targets.

They applaud management for taking this first really significant step towards reversing the "arms race" and hope that PFE's announcement gives other global pharma companies "cover" to do the same thing. The firm remains Overweight PFE shares and expects the stock to react favorably to the announcement. They also anticipate a relatively upbeat R&D presentation on Thursday for which expectations are relatively low.

- UBS views this as a bold move (and a right one for the industry in general) but they are unsure of how and when the rest of its peer group (especially those with promotion sensitive products and the means to maximize this opportunity) will react.

Firm notes that in comparison to its peer group, a large part of PFE's product portfolio comprises of products that are in the primary care physician domain and many of its key products compete in categories with multiple therapeutic options and likely need continued detailing support. Furthermore promotional support will also be important for growth of new products such as Lyrica, Chantix and Exubera (where PFE is yet to meaningfully channel selling resources).

While PFE believes that this change is to address field force saturation with little impact expected on the sales performance, the firm remains slightly skeptical and believes that in the short term PFE could suffer from being the 1st mover until the playing field levels (with similar cuts from its peer group). UBS notes that when PFE had a modest reduction in its sales force ahead of its restructuring activity (late 2005), there was a significant impact on the number of audited details (as recorded by IMS) with 2005 Y/Y details down 28% and 2006 YTD details down ~20%. Maintains Neutral and $30 tgt.

Notablecalls: Looks like a case of some s-t pain vs. l-t gain. Considering there were rumors regarding a possible sales force reduction ahead of the announcement (I've actually been hearing these for the past 3-4 yrs) I think the upside may be somewhat limited. Not calling this a fading oppy as the R&D meeting scheduled for tomorrow may prolong the optimism.


The WSJ reports that Novartis (NVS) may be prepared to sell Gerber Products and could have a willing buyer in Nestlé. Gerber and Novartis's medical-nutrition business together would fetch between $4-5bn. Gerber alone would be valued at more than $3bn.

“Inside Track” section reports that 2 hedge funds that demanded an overhaul at Pep Boys-Manny Moe & Jack (PBY) have kept buying shares even after grabbing the steering wheel at the auto-parts retailer. The funds, Pirate Capital and Barington Equity Partners, successfully pushed for the ouster of the co's CEO and used their leverage as major shareholders to win a total of 5 seats on the co's 11-member board. Since then, they have continued to add to their holdings, spending more than $16m in Nov to buy nearly 1.3m Pep Boys shares. Pep Boys Chmn William Leonard, who is serving as interim CEO, bought an additional 40K shares this month.

Barron’s discusses Nintendo (NTDOY), saying that investors better buy the co’s new gaming device Wii than co shares. The shares have more than doubled to $28 in the last 12 months, primarily on the strength of another Nintendo machine, the hand-held Dual Screen, better known as the DS. The DS is expected to propel Nintendo's sales by more than 50% in the year ending March, to $7bn, while driving up profits by 70% or better. But the DS is last year's story, and Nintendo is entering into a year of expected slower growth, with sales up perhaps 9% and operating profit up 18%. For the stock to outperform, the Wii will have to be a winner over many months and years of game sales. Momentum investors will be tempted to bid up the shares to perhaps $35 or more as ests for Wii sales rise, but the real proof will come in how the Wii plays out over the course of ‘07, and that could mean some downside to the ADRs in the near term. "The stock has had a good run and a correction would be welcome," says Christian Takushi, of Swisscanto Asset Mgmt. Nintendo shares could have a 15% or so downside from here, says Takushi.

“Inside Scoop” section reports that hedge fund MMI Investments disclosed holding a 6% stake, or 20.6m shares, of Unisys (UIS).

Tuesday, November 28, 2006

Calls of Note Part 4

Two firms are issuing positive comments on SiRF Tech (NASDAQ:SIRF) this am:

- Morgan Stanley is ugrading their rating to Equal Weight from Underweight as the gap between their 2007 estimates and the consensus 2007 estimates has contracted and recent data suggests the risk of SiRF experiencing a sharper than expected Q1 seasonal drop in the PND market has been reduced (relative to firm's more cautious than consensus expectation).

They have increased their Q4 adjusted EPS estimate to reflect licensing income from the u-Nav agreement (management has not provided guidance on this but the firm believes they have enough information to make the call), and 2007 EPS increase from $0.75 to $0.80 (consensus $1.04) to reflect less of a Q1 seasonal decline and a moderate amount of licensing income. While aggressive and less valuation sensitive investors may look to data points about the emerging handset opportunity as reasons to buy the stock, the firm believes an Equal-weight-V rating is suitable for most investors.

- C.E. Unterberg notes they expect Personal Navigation Devices (PNDs) to be one of the hottest selling electronic gadgets this Christmas, as the size and prices of these devices has come down further, and are crammed with even more features. Firm notes that Garmin (GRMN) expects unit
shipments to rise 30% sequentially in the December quarter, while TomTom projects their unit shipments would grow between 38%-63% Q/Q this quarter, suggesting room for some upside to their and Street estimates for SiRF in Q4.

Additionally cell phone carriers are beginning to roll out services that tap into the GPS capabilities of handsets. Recent press reports indicate that in Paris, drivers will soon be able to use their GPS enabled handsets to locate nearby parking spots. In the U.S. two providers will soon be introducing a service that enables subscribers to be informed when their friends are nearby.

GPS enabled services have so far been delayed due to what is essentially a chicken and egg situation: not enough GPS enabled handsets as there have been limited GPS enabled services and vice versa. SiRF has been working with handset manufacturers for a very long time, and CEUT believes that most of the forthcoming handsets that can tap into these GPS services will use SiRF's GPS solutions. Firm continues to believe that 2007 will be a big year for SiRF's handset business, while in the near-term the increasing adoption by consumers of PNDs continues to drive the company's sales.

Notablecalls: Love the calls. Normally, I'd be all over SIRF but this time I think trading dynamics trump fundamentals.

Calls of Note Part 3

- Goldman Sachs is adding Quicksilver Resources (NYSE:KWK) to their Americas Buy List saying that while the Barnett Shale is considered by the Street to be one of the top fields for natural gas production growth in the US, they believe that there is controversy as to the quality of acreage in outer-lying parts of the play that has caused Quicksilver Resources shares to be unduly discounted. Current Street expectations are that acreage in the "core" part of the play in northern counties as well as "non-core" Johnson County is attractive, while other counties are unattractive. Firm believes the core and Johnson are more attractive but that there are still attractive drilling opportunities on Quicksilver's acreage. Sees 23% upside to $49 12-month price target.

Catalyst: Goldman believes that the combination of analyst meetings by EOG Resources (Nov.
29), XTO Energy (Jan. 23) and Quicksilver (Feb. 13) will provide both greater detail and focus on the Barnett. They believe that these meetings combined with greater drilling results from Somervell and Bosque counties could lead to a revaluation of Quicksilver shares, which is why the firm is upgrading the stock to Buy from Neutral.

Notablecalls: Expect to see buy interest. Would not chase.

Calls of Note Part 2

- Piper Jaffray comments on PetSmart (NASDAQ:PETM) after Wal-Mart opened its first pet grooming facility in Brentwood, TN, with 12 additional facilities expected in the Southeast over the next 12 months.

While the firm anticipates that Wal-Mart will expand its grooming test concept, they do not believe that this service poses a significant near-term threat to retailer PetSmart. Rather, they believe increased interest in and awareness of pet services bodes well for the industry. Firm views PetSmart's facilities as having a competitive advantage through a strong brand name and association with professional grooming service. Checks indicated a $56 price point at Wal-Mart for a full-service grooming package (bathing, clipping, nail trim, and brushing), while a similar service at PetSmart costing customers $45.

Entrance of the nation's largest retailer reflects the attractive growth characteristics of the pet services industry.

Maintains MP rating and $30 tgt on PETM.

Notablecalls: I've heard the validation story before as large players enter the market of lesser competitors. Eventually things get tougher. WMT and TGT have increased their presence in the pet biz over the past couple of yrs and will continue to do so. The grooming (or services business in general) generates margins that are 3x higher than products AND drives traffic. It will hurt PETM in the L-T. I would not be surprised to see some weakness in PETM in the coming days.

Calls of Note Part 1

- UBS is positive on Apple (NASDAQ:AAPL) saying their checks point toward solid iPod sales for new shuffles & certain nanos along with momentum in Macs and prospects for higher accessories & software longer-term. Firm continues to believe AAPL will launch new products in calendar '07 (not fully reflected in their model) including cell phones, iTV & even ultraportable devices.

Given their findings, the firm is raising their 1Q07 EPS estimate to $0.80 (was $0.78) based on 11% revenue growth (+32% q/q) to $6.4B (was $6.3B) & operating margin of 14.2% factoring in higher iPod unit growth of 18% to 16.56mm (was 15.6mm) and still reflecting Mac unit growth of 44% to 1.8mm.

Given prospects for new iPods and with Mac sales momentum drivng software & peripherals, they are raising their FY07 EPS estimate to $2.84 (was $2.75) based on 23% revenue growth to $23.76B (was $23.25B). For FY08, estimate adjusts to $3.35 from $3.15 based on 18% revenue growth to $28B (was $26.7B).

Reits Buy and ups tgt to $108 from $95.

Notablecalls: This is the second tgt raise above the $100 level. Is it actionable? Most certainly not.

Color on warning: Palm (NASDAQ:PALM)

Several firms are commenting on Palm (NASDAQ:PALM) following the warning issued last night:

- Merrill Lynch is taking their rating to Neutral from Buy noting that while Palm's design capabilities and valuation (ex ~$5 cash per share) remain attractive, they believe differentiation is getting more difficult vs. integrated (handset+service) rivals like RIM, and larger scale hardware-only competitors like Motorola and Nokia.

Palm cited product certification delays, and the firm believes the major reason was a complete miss (in 2Q) of Treo 750 shipments and a 2 week delay in Treo 680 shipments, both to Cingular. The magnitude of the miss also indicates possible price pressure on Palm's Treo 700p/w. Firm notes Palm's F2Q07 miss follows F1Q07 warning due to price competition from Motorola's Q smartphone, and F4Q06 miss due to delayed launch of European Treo 750v smartphone.

Although the firm sees no near-term catalysts, they believe Palm stock has limited downside from current levels. Palm's four new product cycles, including the recently launched Treo 680 and 750, could also help to revive prospects and sentiment in 2007.

- RBC Capital notes that in its Q1 call, Palm indicated it had already widened Q2 guidance to ''prudently' accommodate delayed product certification. This miss is another blow to investor
confidence in Palm's recovery.

The delay is ill timed, just as Palm faces intensifying competition from $199-$150 ASP Smartphones from RIM, Nokia, Motorola, Samsung HTC. The Treo 750 may now miss the important Christmas season, and its premium price (est. $400) may face resistance (Verizon has recently had to discount the 700w).

Incorporating the delay, RBC's F07 estimates become $1,584M (0% Y/Y growth, formerly 10%) and $0.73 proforma EPS (prior $1,735M and $0.90 EPS). F2008 estimates become $1,766M (11% Y/Y) and $0.84 proforma EPS (prior $1,956M and $0.96). Tgt goes to $15 from $16. Maintains SP rating.

- JP Morgan says that in their view PALM is struggling with bigger issues relating to product cycle, positioning and pricing, in the context of intensifying competition.

The company is under intensifying price-based competitive pressure, and delays in shipping the 680 and 750 could persist into the peak holiday season, crimping sales further. PALM is trading at 20.8 times revised fully taxed FY07 PF EPS of $0.74, a 26% discount to the mean of firm's coverage universe on a current year basis and an ex-cash multiple of 17.2x fully-taxed PF FY07E EPS of $0.60 ($5.05 cash/share). Maintains Neutral.

Notablecalls: Usually these one-time issues are buyable but in PALM's case we have an exception to the rule. They guided down on June 30 and warned on Sept 7. And now warned again, saying "Oops, we're going to miss our biggest qtr." There isn't much investor confidence left after last night. I expect the shares to go sub-$14, maybe even today. The last prints in after hrs trading were around $14.60-$14.70.


According to the WSJ’s „Tracking the Numbers” column, Wall St. thrives on risk, so what better investment these days than the subprime-mortgage business. Lenders that make home loans to buyers with troubled credit history sprinted ahead during the housing boom, only to see prospects wane as interest rates rose, home prices fell and borrowers had trouble making payments. With losses mounting and consolidation sweeping the industry, Wall Street, not the banking industry, is emerging as the consolidator. In the past 3 months, Morgan Stanley (MS) agreed to buy Saxon Capital for $706m. Merrill Lynch (MER) struck a $1.3bn deal to buy National City's First Franklin lending unit, and Bear Sterns (BSC) is buying the mortgage unit of ECC Capital for $26m. H&R Block (HRB) recently disclosed it might sell its Option One lending unit, which last year made about $40bn in loans. "Clearly the broker-dealers are leading the charge," says Matthew Howlett of Fox-Pitt Kelton.

According to the “Heard on the Street” column, bad news may be in store for Western telecom-equipment makers hoping to cash in on China's expected $10-30bn investment in new 3G wireless networks over the next 4-5 years. Manufacturers, including Motorola (MOT), Lucent (LU), Nortel (NT) and Ericsson (ERIC), that have long dominated the Chinese mkt are faced with the possibility of losing sizable mkt share. China is expected to try to give its own equipment makers a boost by launching its 3G networks with its own technology standard, called TD-SCDMA, along with other standards. In the past 10 years, Chinese co’s Huawei and ZTE have been expanding aggressively in the global mkt and are ready to compete for 3G equipment contracts at home. China was expected to have made a decision by now on licenses for carriers to upgrade to 3G. That hasn't happened yet, in part b/c tests of the TD-SCDMA technology are taking longer than expected. "When China starts building 3G networks, it will probably have a negative impact on Western vendors," says Ping Zhao, of CreditSights. "Especially if they have hyped up their 3G expectations for China."
Barron’s Online “Inside Scoop” section reports that 4 Crocs (CROX) insiders have been stepping out of the footwear maker's shares, which have nearly doubled since its IPO in Feb. The sellers, who include CEO, a vice president and two directors, sold a total of $54.6m in stock.

Monday, November 27, 2006

Calls of Note Part 7

- ThinkEquity's Jonathan Hoopes notes that on Sept. 25th, his firm raised their Apple (NASDAQ:AAPL) price target to $100 based on an analysis that suggested Apple's strong back-to-school CPU share-gain momentum would carry into the December quarter. Today, they are raising their price target to $110 as our proprietary 'Black Friday' survey of Apple Retail stores across the nation indicates likely upside to our Retail Store revenue estimate of $1.45 billion for fiscal 1Q07. Apple's Retail Store is a clear differentiator and significant catalyst for further CPU share gains and profit margin expansion, in firm's view. Reiterates BUY rating.

According to ofirm's math, Apple Retail Store visitor traffic ranged between 860,000 and 916,000 on Black Friday. Moreover, Apple Retail Store revenues likely ranged between $36 million and $41 million on November 24th. By extension, the holiday season is set to deliver between $813 million and $916 million of revenues for Apple's Retail segment.

Notablecalls: I think the main reason this call will get some attention is because it's the first time AAPL's tgt goes over the $100 level. Expect to see some buy interest but I'd generally be looking for a fading oppy. Especially with this tape.

Calls of Note Part 6

-Citigroup notes Hess (NYSE:HES) remains their top pick of the US oil majors. Firm is raising their target price to $68 from $58, to reflect expectations of multiple expansion as management enters the execution phase of a turnaround strategy that matures over the next year.

2006 promises the 1st of a multi-year period of growth in oil & gas prod'n: key projects are running ahead of schedule; 2006 is also a stellar year for reserve replacement and the 4th year of consecutive reserve life growth but captures only a fraction of the resource secured by current management.

The value gap vs its peers is tangible, with HES the only major trading below SEC value. Exploration is an upside; but the shares already ignore a growing list of unbooked discoveries where value is verified by recent transactions.

Credibility is an old excuse for current misvaluation. Execution is the catalyst to force a rerating as the impact of a multi year t/around becomes tangible. If the market does not recognize
this, the firm believes someone else will. Reits Buy.

Notablecalls: The wording of the call is strong enough to give me goosebumps!

Calls of Note Part 5

- Goldman Sachs is adding Celanese (NYSE:CE) to the Americas Conviction Buy List as they believe shares will trade up to their $29 price target (35% potential upside) as the company continues to demonstrate the resiliency of its earnings stream, justifying a potentially higher multiple. In firm's view, valuation metrics have failed to reflect positive industry fundamentals due to mischaracterization as a pure commodity chemical company and the financial sponsor overhang. A more aggressive debt paydown schedule and a tight acetyls market should lead tobetter-than-expected earnings growth. GS is raising their 2007/2008 EPS estimates by $0.05 to $2.90/$2.95, respectively.

Catalyst: Firm expects the December 13 investor day in New York to be a positive catalyst as they expect management to provide a favorable outlook for acetyls through at least 2009. In addition, the financial sponsor's stake is slowly diminishing, with Blackstone now owing just 15% (or 24 million) of outstanding shares.

Notablecalls: Expect to see buy interest in CE today but keep it on a tight leash as the stock has been vertical lately.

Calls of Note Part 4

- Citigroup reiterates their Buy rating on Marriott International (NYSE:MAR) shares and are increasing their price target to $55 from $48, or 24x '08 EPS. This is below MAR's '07 multiple of 25x, but above its historical average of 21x. Cyclical growth, new unit expansion and aggressive share repurchases are driving strong EPS momentum (+20%/yr for '06- '09), ROIC improvement and valuation expansion versus history. By 2009, Marriott's hotel system should be 16% larger, its average share count 18% lower and ROIC should be in the mid-to-high 20's vs. 20% in 2006.

MAR is an attractive mid-cycle lodging play, as unit growth, share repurchases and timeshare should offset gradual REVPAR deceleration. As such, MAR could sustain faster 3-year earnings growth than its real estate intensive peers (+20% vs. +16% at REITs).

During a comparable period of the last lodging cycle ('95-'97), as the industry transitioned from "early recovery" to "mid-cycle growth", MAR out-performed the S&P 500 over 3-years. MAR shares are up 21% since early October, when Marriott's strong 3Q earnings report alleviated what had been a concern among some investors that lodging fundamentals were weakening. Underlying demand trends remain strong and the '07 outlook is positive.

Notablecalls: Just a chart play. I have no view on the fundamentals. Tight leash.

Calls of Note Part 3

- Merrill Lynch notes that Micron's (NYSE:MU) stock has been mired in the $14 - $15 range since the company's disappointing performance for the Aug-06 quarter, but the firm thinks the stock could move back to the $16 - $17 range in the near term. From a short-term trading standpoint, they think that the increase in memory pricing combined with Micron's underperformance relative to both the SOX and the Dow could drive a catch-up rally.

ML notes they have their doubts about Micron's ability to actually capitalize on the stronger DRAM environment, and that underpins firm's Neutral rating. Micron has struggled to take advantage of the strong operating environment in the DRAM business. The company's performance during the August 2006 quarter was disappointing, as gross margin backslid despite steady pricing. However, they do think that the pricing environment is likely to hold up, especially for leading-edge DDR2 products. Even if Micron ultimately doesn't benefit from the pricing strength, they think it's only a matter of time until the market notices that the only liquid U.S. DRAM play is lagging the market while DRAM pricing continues to firm and the introduction of Vista and its increased memory requirements draws closer.

Notablecalls: ML's Joe Osha has made an actionable call on MU here. I continue to expect MU to move up from current levels.

Calls of Note Part 2

- UBS notes they attended Renewable Energy Corporation's (#3 polysilicon company) field trip to both its solar wafer plant and its analyst meeting in Norway last week where the company suggested polysilicon could likely remain in shortage until 2011. The company also suggested silane gas (key feedstock to make polysilicon) could be in short supply as REC has about 70% share and MEMC (NYSE:WFR) has about 25% share.

Renewable Energy Corporation estimates its new fludized bed reactor (FBR) based polysilicon plant, being built now (production expected in 2H08), will have about 50% less costs than its original Siemens based polysilicon plant. Firm notes that MEMC has been the only polysilicon company with FBR technology for the past 5-10 years.

Also,recent discussions with industry contacts suggest that MEMC has recently re-negotiated its semiconductor wafer contract with Infineon for 2007. They believe MEMC was sucessful in raising prices by 9-10% from its prior contract pricing for both 200mm and 300mm semiconductor wafers.
Maintains Buy and $60 tgt.

Notablecalls: I have highlighted UBS's positive comments on WFR in the past and with good results. While I don't think the price hikes with IFX provide drastic upside to current ests, they do add to the positive perception of the space. The stock has been inching up and looks to be on the verge of another move upward. Think WFR may soon be a $40 stock. Even then UBS' tgt would provide 50% upside.

Calls of Note Part 1

Some comments on Wal-Mart (NYSE:WMT) and Black Friday:

- JP Morgan notes WMT posted a negative 0.1% SSS in November - its first monthly comp below 0% in 10+ years (April 1996 @ -0.6%, Easter shift driven). While the results were more/less in-line with expectations (guidance of "flat"; JPM at +0.5%) the firm continues to scratch their heads as to why sales are not improving provided the precipitous drop in gas prices and stable consumer confidence levels. All in, they remain skeptical on the company's ability to change its image on a dime and with this in mind they'll stay Neutral.

While the stock's absolute/relative underperformance over the past 5 years (cumulative loss of ~34% vs. SandP 500 down ~8%) has tempted the firm to get bullish, they do not see a positive catalyst on the horizon. Moreover, while much of the bullish sell-side view emphasizes valuation (trading at a noticeable discount to historical average - resting at 14.9x 2007E EPS, a 33.1% discount to its10-year average), they actually think the stock has been accurately "revalued" by the market given WMT's 1) slowing comp trends, 2) aggressive commitment to sq. ft. growth, 3) augmented risk profile (e.g., merchandise makeover, international expansion, field level management changes), and 4) uninspiring margin performance.

- UBS notes they are somewhat surprised by WMT's Nov. sales given what appeared to be both a conservative plan (which factored in current co.-specific headwinds) and an early/aggressive push for holiday sales. Firm's Blitz day store visits revealed brisk traffic and strong sell-through of special offer items. Perhaps the multitude of rollbacks at WMT did not have the desired, broad shopping effect. Firm thinks this news could result in further near-term weakness in WMT shares.

- Banc of America believes WMT's November weakness was the result of two issues. 1) There simply are not enough registers and parking lots. This time of year, the stores are at or near capacity and it is to difficult to make up for lower prices with enough increased traffic in the month. 2) The aforementioned apparel fashion miss, which hurt October as well as November. Firm believes they were willing to sacrifice the weak November sales, especially considering the weak fashion statement they were making, to try and refocus customers on WMT as the price leader for the holiday season. Believes they guide to 1-3% comps for December, and expects them to hit the high end of the estimate.

Consumer electronics sales were strong this weekend. Contacts that the firm was able to get in touch with, were very bullish about Black Friday and Saturday sales. For BBY and CC, this bodes well. They believe the struggle for both is making up for the accelerated price declines with enough incremental unit growth. At least for the weekend, the firm thinks they succeeded.

- CIBC notes their Black Friday morning store checks in three areas indicated that consumer
electronics retailers are clearly winning wallet share. Home goods and furnishing stores saw less traffic in general. Firm continues to favor BBY and CC and see challenges for WSM.

Crowds were overwhelming at both BBY and CC. At the NYC 86th St. location, we could not even enter the CC store. At BBY, best deals were Insignia (BBY's own) items which were popular in baskets. CC also had long lines for in-store pick-up of on line purchases.

Low traffic in Williams-Sonoma, Pottery Barn, PB Kids and PB Bed & Bath. Generally no deals at WS, PB Kids and PB B&B. BBBY stores were relatively quiet in all locations. Holiday spirit not as strong as WSM stores but holiday decor items definitely available and featured near front of store. Pier 1 Imports was very promotional with full blown holiday sets but again no traffic.

Notablecalls: The consumer is NOT bent up, it's spent up. Not enough registers and parking lots at WMT? What? You're kidding me? I'm not overly negative on the stock, though. Would not be surprised to see a bounce following initial weakness as the negative comps were pretty much expected already. There are some negative comments on the generic program but one should consider the fact it was just rolled out and will take some time to find traction.


According to the WSJ’s „Heard on the Street” column, increasing concerns about devices that open clogged arteries are causing some chest pains on Wall St. Just a few months ago, many analysts were ebullient about these drug-eluting stents. J&J (JNJ), Boston Scientific (BSX) and Abbott (ABT) recently have placed big bets on the mkt, with its roughly $5.4bn in annual sales. The technology has been battered in recent months by safety questions, and some co’s have run into manufacturing and other challenges. There could be new hurdles in coming weeks. Investors and analysts are toning down their enthusiasm, with some even saying the mkt will shrink, as attention turns to a high-profile govt panel that will hold hearings soon on the devices' safety. "The growth prospects for drug-eluting stents are poor, certainly in the immediate and near term, and perhaps even in the longer term," said Robert Goldman, of KeyBanc. Competition is rising and prices are falling, he said, while "safety concerns are exacerbating the problems and making the prospects for the mkt all the worse."

Sunday, November 26, 2006

Barron's Summary

Investors appear to be overvaluing the long-term benefit Vertex (VRTX) will get by being the first to mkt an effective hepatitis C drug. Its shares are worth closer to $30 than $50.

Notablecalls: Actionable!

Fund manager top holdings include DOX, CSE, ERTS, STZ, DVA, GHCI, DOV, OSK, TPX and COH.

Schwab Equity Ratings top 20 includes: HAS, JWN, CAG, NTY, PKD, GRP, AMP, MET, BAX, MCK, CAL, TFX, BMC, HPQ, GEF, SEH, AT, Q, AES and PCG.

Cash-rich co’s in the consumer, energy, home-building and tech sectors all could be tgts of leveraged-buyout firms. LBO tgts mentioned include: GPS, MU, BBBY, NKE, LIZ, EMC, COST, APA, VLO, HES, RIG, AVP, KMB, EL, KBH, DHI, LEN, TOL, MDC, HOV, LLTC, MXIM, ADI, ALTR and XLNX.

ASM Intl. (ASMI) shareholders should do well, regardless of how the dispute with Mellon (MEL) ends. But Mellon investors could suffer unless it makes changes. One bear has a 37 target on Mellon, recently selling close to 41.

“The Trader” column discusses Freeport (FCX) and Phelps Dodge (PD) merger. Stripping out cash on Phelps' balance sheet, the Freeport bid values Phelps at roughly 6x forward earnings, compared with the 25y avg of about 8.3. John Tumazos, of Prudential, sees "plenty of room" for Phelps to rise 15 to 30 a share above Freeport's bid, and has a $170 price tgt on Phelps.

“The Trader” highlights Yum Brands (YUM), saying that for Yum’s shares to climb anew, the co first must improve its bedrock US operation. The fast-growing China business supports valuing that segment at 25-35x forward earnings, but China still drives only 24% of Yum's projected ‘07 operating income, with international accounting for 28% and the US accounting for 48%. Blending the 3 segments, JPMorgan's John Ivankoe reckoned that Yum ought to trade between 16.7x and 20.5x forward earnings. At about 19.7x today, it is already straining the top of that range. Given the diminished odds for a short-term surge, and how rich Yum option prices look compared with those for, say, McDonald's, Goldman Sachs strategist John Marshall has suggested selling OTM calls against the stock as a way to pad yield.

Barron’s recommends to invest in Chinese mobile telecom. China Mobile (CHL), the dominant provider, is still a strong, long-term prospect, though its weaker rival, China Unicom (CHU), could be worth a side bet. China Mobile, with its strong mgmt team, enjoys most of the spoils of a rapidly expanding mkt, which also offers big economies of scale. Meanwhile a politically motivated decision several years ago saddled China Unicom with the task of running two networks: GSM and CDMA. "China Unicom is suffering self-cannibalization," says Marvin Lo, of BNP Paribas. China Mobile, on the other hand, is a "growth co," says Steven Liu, of DBS Vickers. The likely restructuring of the sector is the key reason to buy Unicom. "With Unicom, it's more a story of how it's going to be broken up," says Khiem Do, of Baring Asset Mgmt.

Wednesday, November 22, 2006

Calls of Note Part 2

- Cowen notes that with expectations low entering next week's Capital Markets Daythey would be surprised if Nokia (NYSE:NOK) failed to produce more than anticipated at the event and see the shares reacting well near term to any positive. Firm's long-term caution remains unchanged, however, and they still expect lower ASPs,NSN costs and QCOM-related expenses to weigh moving forward.

Expecting No Major Surprises At CMD - But Few Are. Nokia will be hosting its annual Capital Markets Days on Nov 28-29 in Amsterdam. Cowen expects little change in tone from senior management at the event, perhaps beating expectations fearing worse. They expect NSN integration costs to be the most likely fade to guidance, but note that many now expect that.

Firm sees Nokia issuing a generally constructive outlook for the mobile phone industry (~8-10% y/y) and reiterating 15% q/q unit growth for 4Q06. The ongoing dynamic maximizing revenue/share at the expense of ASP/margins is likely to continue until new phone products arrive and 3G reaches critical mass.

They believe three items loom as potential issues for the stock over next 6-12 months. 1.) "thin" designs are several quarters away 2.) High Nokia-Siemens Networks integration costs might prove EPS dilutive in 1H07, FY07 3.) High expenses related to QCOM.

Firm's new FY08 EUR 1.18 EPS estimate represents a modest 7% increase from their FY07 estimate and is a penny under consensus. Nokia is having a difficult time attracting a higher multiple because of its modest organic growth and margin contraction.

Trading at 14x their new F08 estimate, Nokia still looks attractively valued but without an
obvious catalyst. Remains at Neutral.

Notablecalls: Nokia has been hibernating and needs to come up with some fascinating products to spark investor interest. The problem is that it's still struggling with the thin designs that will be ancient by the time they reach the mkt. It also looks like they are at the wrong end of the Telco capex. But I guess that leaves ample room for surprise.

Calls of Note Part 1

- ThinkEquity notes that as they have pointed out numerous times that they believe 802.11 will experience a very high attach rate in cell phones for reasons of cost and indoor coverage.
Cost is the most important, as the firm believes a high percentage of cell phone calls are made where such traffic should rather be carried over unlicensed frequencies in smaller cells. Approximately one billion cell phones are sold per year, and they believe it reasonable to believe that half of the global cell phone sales could contain 802.11 chips within five years.

As such, they believe QUALCOMM (NASDAQ:QCOM) may want to upgrade its 802.11 silicon content from cooperation with Atheros to something internal. In English, that means making an acquisition. So what would QUALCOMM acquire to accomplish this goal?

ThinkEquity thinks privately held Airgo of Palo Alto is the prime candidate. Firm believes a QUALCOMM acquisition of an 802.11 asset would hold negative consequences for Atheros (NASDAQ:ATHR). It appears that if QUALCOMM acquired Airgo, it would then be a matter of time before Atheros ceased deriving the perception of future benefits from QUALCOMM's cooperation.

Having said that, the firm remains positive on Atheros' overall positioning and outlook and Reits Buy with a $30 tgt.

Notablecalls: Not actionable but good to know category.

Color on quarter: Dell Computer (NASDAQ:DELL)

Several firms are commenting on Dell Computer (NASDAQ:DELL) after the tech heavyweight managed to surprise investors with a margin rebound last night:

- Bear Stearns is upgrading their rating to Outperform from Peer Perform saying that while Dell (NASDAQ:DELL) is not out of the woods and has more work to do, there are signs of a turnaround and improved focus on profitability vs. growth. While risk remains given limited visibility and overhang from SEC investigation, after 5 qtrs of disappointing results, the firm senses that the situation has bottomed. Though it may take time to show sustained improvement, they see favorable risk/reward.

As the firm has noted in other cases (HPQ, SUNW), turnarounds in tech can lead to big gains, but they are rarely straightforward and investors must be early. While Dell doesn't meet all their turnaround criteria, they sense less "denial" from Dell. Further, any more missteps could result in mgmt changes at the top, which could also be a positive catalyst. While it's logical to compare Dell vs. HPQ, to them the issue has been Dell vs. Dell. In firm's view, Dell got too big and wasn't ready for the next phase. Moreover, Dell chased revs for the sake of revs, moving away from its mantra of balancing growth/profit/liquidity.

After 7 est. cut in past yr, the firm is raising ests but caution that they think they're directionally right, but there may still be volatility. Firm is raising EPS for FY07 from $1.05 to $1.17 and for FY08 from $1.20 to $1.45. If firm's thesis is right, the stock has potential upside to their $35 target (20x CY08 EPS), though turnarounds often perform better than one thinks.

- Prudential thinks the story has just begun and believe that Dell only partially benefited from its key margin drivers in the OctQ - 1) stable PC pricing and a richer product mix, 2) server/storage product cycles, 3) reduced component costs, and 4) services expansion. Firm expects to see more margin leverage in coming quarters as these initiatives to improve profitability gain traction.

They are modeling Dell to increase operating margin by another 100 bps over the next 2-3 quarters, and then turn further cost reductions into more aggressive pricing to win share.

Firm continues to believe Dell has the best chance in their universe to post upside to consensus estimates over the next several quarters. They are increasing their street high FY08 EPS estimate by $0.11 to $1.61, and are raising price target to $31 frm $28. Dell remains firm' top pick.

- Merrill Lynch notes Dell's growth decelerated to +3% YoY despite an easier compare, which
underscores that margin progress requires a revenue tradeoff (worth making at this stage, in their view). Although aggregate revenues were within 1% of firm's recently lowered model, the mix was different. Desktop revenues missed ML model by 2 points and declined 9% YoY. Mobility beat the ML model by 3 points and grew 9%. Servers beat by 12 points and grew 12%. Storage beat by 5 points and grew 29%. Services missed by 10 points and grew 12%. Software and peripherals missed by 6 points and grew 8%.

Firm's matrix suggests an operating margin snapback above 8% (above 7.5% including FAS123) is needed to make the argument for owning the stock. They are not convinced margins will approach the recent annual peak of 8.6%. Maintains Neutral.

- JP Morgan notes Dell's revenues of $14.38 billion were a bit light relative to their estimate
of $14.45 billion, but EPS of $0.30 exceeded our estimate of $0.24. Without any significant changes to the business model, it appears Dell will choose to continue to harvest profits, and growth may remain tepid for quite some time.

Pricing discipline apparent. Part of the upside was clearly due to Dell's movement away from low-end PCs, and this was the primary reason Dell's unit growth was only 3% compared with HP's 16% unit growth.

Move away from low-end PCs only partly explains the margin rebound. The loss of the Intel subsidy could have been a driver of Dell's margin shortfall last quarter, while this quarter's improvement may have been driven by price concessions from AMD. HP may seek to gain similar price concessions. In firm's view, these concessions for Dell are likely to be matched for HP given the company's similar size and higher AMD-based volumes. As a result, they believe the long-term relative profit improvement for Dell remains questionable. They believe this will either show up as lower margins, or the relative cost compression will hold back the company's overall growth rate.

Even off of upwardly revised estimates, Dell is trading at 17x JPM's calendar 2007 EPS ex-options estimate. Firm believes this valuation is too rich given the uncertainty over future margin levels and tepid growth, and they continue to prefer exposure to Overweight-rated HP.

- Morgan Stanley notes they remain owners with a 12-18 month time horizon; buy on dips. Preliminary numbers better than market anticipated and stock should trade up on news. Longer-term, evidence suggests management is driving business growth and profitability in a more balanced manner. If execution continues, they still believe $1.84+ normalized EPS is doable.

Short-term focused clients should trim into strength. While last night's report was encouraging, the SEC investigation likely remains an overhang on the stock between now and year end. The next meaningful step-up in operating margin is also a couple of quarters out. With these headwinds and lack of a near-term catalyst, the stock is likely range bound near-term. Firm looks to buy on dips to own into Vista-related growth, Analyst day and improved margin catalysts in early 2007. Maintains Overweight and $30 tgt.

Notablecalls: I think DELL can trade briefly over the $27 level this morning but will close below that level. While I'm surprised by the margin upside I remain skeptical regarding additional margin expansion. Also, the news from DELL may put some additional pressure on AMD.


According to the WSJ’s „Heard on the Street” column a surge in deals is stoking takeover speculation. Some point to Sprint Nextel (S), Hilton Hotels (HLT), Avis Budget (CAR) and home builders such as Lennar (LEN), Ryland (RYL) and D.R. Horton (DHI) as possible tgts. Private-equity firms are circling home-service co Service Master (SVM), say ppl familiar with the matter.

The WSJ reports that Nov started off with 30 insider sellers and no buyers among co’s in the S&P's broadcasting and cable index, said Mark LoPresti, of Thomson Financial. From the beginning of Sept through early Nov, insiders in Mr. LoPresti's study sold $32.3m of shares, while spending $91K on purchases. Univision Comm. (UVN), Liberty Global (LBTYA) and TiVo (TIVO) had the largest sales by dollar value. Cable and broadcast industry insiders headed Mr. LoPresti's list for bearishness in two metrics, the "head count" metric in which individual sales are tabulated, and another measure designed to compare sales and buying. "When I see an industry kind of take the lead in one of the metrics, and they're not a very active industry to begin with, I usually take notice," said Mr. LoPresti. "When you see this ... you want to look at the last time you saw something like this." The last time this industry's insiders behaved similarly was in ‘96, Mr. LoPresti said. "After that activity, the S&P broadcasting and cable index fell about 23%" in the next 9 months, he said.

Barron’s Online discusses Mentor (MNT), whose stock is up 41% since May. Yet Mentor faces some lofty expectations. And with the stock flirting with new highs and steep multiples, its premiums leave little room for disappointment. "We believe we are at a point of peak investor sentiment," says Alexander Arrow, of Lazard. "Silicone approval is the most important thing to happen to the industry in a decade. But the expected conversion rate to silicone is significantly higher than we expect, and over the next year, we don't see any catalysts for the stock."

“Inside Scoop” section reports that Google (GOOG) insiders trim back on sales. Insider sales, judging by the number of shares, have tapered off this year. So far in ‘06 Google execs and directors grossed more than $3.7bn by selling 9.4m shares on the open mkt. In ‘05 they sold 16.7m shares for nearly $4.7bn. From the Aug. 19, ‘04, IPO through the end of that year, insiders sold nearly 8.6m shares for $929.4m.

Tuesday, November 21, 2006

Calls of Note Part 7

- CIBC notes that when they initiated coverage of Goldman Sachs (NYSE:GS) on March 1, 2006, some were taken aback by their enthusiastic price target of $195, as the stock was then at $143. The stock is now close to $200 and the firm israising their price target once again, based upon the same valuation methodology but an even higher 2006 year-end book value estimate and a higher 2007 estimate outlook. Firm's thesis remains simple: Goldman will have the highest revenue growth of the group as they had dominant market share in the fastest growth and highest margin businesses such as M&A, commodities, distressed investing, and the most commanding presence in JC (Japan and China) of all its investment banking peers. They believe the highest correlation to outperformance amongst the brokers is with revenue growth and that Goldman will continue to grow faster than its peers due to its franchise position. In addition, while they do not project future gains from its Principal Investing portfolio, the firm believes that 2007 and 2008 will look much of the same way 2006 did in terms of additional earnings upside from investment gains.

CIBC believes that while some investors may question whether the exceptionally strong 2006 results create too difficult comparisons in 2007, they believe that Goldman has a proven track record of deploying its capital. A higher capital base should not be a concern for investors, as company management has stated recently that investment opportunities are the best they have ever seen.

Tgt is upped to $250 from $205.

Notablecalls: GS stock was up around 1 pt in after hrs trading following the call. I think it has a fair shot of hitting $200 today. That's where it is most likely to pull back. It's a kind of a trading rule (in a world of no rules) that round numbers act as resistance when reached the first time.

Calls of Note Part 6

- UBS notes their global memory and end market checks are leading them to increase their sales and EPS estimates for Micron (NYSE:MU). Firm's F1Q07 sales estimate is increasing to $650M from $625M, with EPS advancing to $0.21 from $0.20 (pro forma $0.22). They believe the company is benefiting from stronger than expected PC demand, contract pricing increases, and solid NAND production ramp.

From a commodity PC DRAM perspective, what they believe to be a generally healthy demand environment for desktop and notebook PCs that ship in a "Vista Ready" configuration of 1GByte of DRAM or more continues to provide support for DRAM ASPs. DDR2 pricing in particular is seeing more of this ASP support relative to DDR as more recently launched PC platforms only support the former. With an estimated two thirds of PC DRAM production centered on DDR2, the firm believes Micron is maintaining pace with the industry's migration to DDR2.

They are also increasing F2007 EPS estimate to $1.20 from $1.15 (pro forma $1.25) owing to slightly more favorable GM assumptions as MU pulls down inventory in wireless areas, benefits from mix improvements, and accelerating DRAM and NAND cost decreases.

DRAM Spot and contract pricing are up 35% and 41% YTD, with a Spot premium of 9%. Contract pricing continues to rise into Nov Qtr end and should support higher financial projections, while DRAM spot appears to be reaching a near-term floor and argues an extension of this strength through

Maintains Buy and $24 tgt.

Notablecalls: I've been positive on MU since Nov 14 and looks like the call made by Bear Stearns continues to play out. The stock shot up following the call but has been coming in over the past couple of days. I think UBS comments will produce the needed bounce. Actionable call alert!

Calls of Note Part 5

- Citigroup notes Novellus Systems (NASDAQ:NVLS) traded up ~8% today as checks suggest a growing view among buyside investors that NVLS is a potential M&A target - either for private equity or a larger competitor. Recent cancellation of attendance at two conferences (LEH and CS) has fueled this view.

While their analysis of financial and strategic fits indicates TEL (#2 equipment supplier) as a plausible consolidator in a competitive takeover, they view a TEL/NVLS deal as being unlikely given cross-border M&A has historically proven difficult + TEL's success at integrating acquisitions in the past is mixed.

With respect to private equity interest, firm's work (in conjunction w/ input from Citi's risk arb team) indicates a NVLS deal under typical debt/equity assumptions and a ~25% equity premium would drive only ~11% IRR, or well below the typical 20-30% hurdle rate for PE deals - even in this environment.

Maintains Hold and $32 tgt on NVLS.

Notablecalls: There was some serious action in NVLS yesterday but I think Citi's comments will put a cap on that move.

Calls of Note Part 4

- FBR notes their recent checks have provided more color with regard to expected NVIDIA (NASDAQ:NVDA) and PLAY content in upcoming iPod designs. They believe NVDA has been designed into the upcoming video iPod, and that PLAY has been designed out (both consistent with prior speculation). Firm also believes that PLAY has been designed into the upcoming iPhone (which they don't think is in consensus). They also believe that NVDA's acquisition of PLAY gives it an inside track at providing an integrated applications / video processor in a future video iPod for 2008. Net, they expect combined PLAY and NVDA music player revenue of $280 million in 2007, following the close of the PLAY acquisition, with the potential for further revenue from an enhanced Apple relationship in the future.

Firm believes the next generation video iPod will use NVDA's video processor and Samsung's application processor. Check also confirmed that PLAY's application processor would be designed out of the video iPod, to be replaced by Samsung. firm alsos believe NVDA will provide the video processor, displacing BRCM, due to NVDA's advantage of lower power consumption. While NVDA's participation in the iPod is not a complete surprise by now, it's also not in current estimates. Firm expects $100 million in incremental 2007 revenue from the video iPod, assuming 14 million units in 2007.

Notablecalls: NVDA being designed into the iPod is not news. Nor is news that PLAY has been designed into the upcoming iPhone. NVDA looks pretty much as RIMM looked yesterday. But I suspect the call isn't powerful enough to create such buy interest. Anyone disagree?

Calls of Note Part 3

- JP Morgan's Jay Deahna is making another call on Cymer (NASDAQ:CYMI) saying it's an above-average secular growth story driven by its leading-edge lasers that is fueling revenue growth and gross margin expansion. Also, the company has extensive tactical programs underway to drive GM expansion beyond the "mix" effect. Further, Cymer has an improving business model that ranks 6th out of 15 equipment companies in firm's Operating Effectiveness/Wealth Creation (OE/WC) analysis and a high margin service and spares business that comprises roughly 50% of revenues. As such, they see CYMI shares as a solid offensive and defensive story and the likelihood of a C4Q06 upside order surprise by ASML should enhance confidence in solid EPS growth for Cymer in 2007.

Consensus for 2007 EPS is $2.76 vs. JPM at $3.20. Firm expects consensus to rise as their lithography thesis unfolds and immersion gains momentum. They believe consensus underestimates the growth prospects and stickiness of Cymer's revenue potential and gross margin expansion through a steady mix shift to its higher value-add/ASP and higher margin systems. If capital spending declines in 2007, EPS estimates may be high.

Notablecalls: I'd be looking to play CYMI off of the ASML call as ASML is CYMI's largest customer. And you already know what Jay said about units.

Calls of Note Part 2

- JP Morgan's Jay Deahna is making a call on ASML Holdings (NASDAQ:ASML) saying they believe consensus is deeply wrong on ASML's 2007 and beyond EPS potential. The likelihood of a positive C4Q06 bookings pre-announcement, based mainly on new customer wins in Taiwan and Japan in early to mid December, should be the next catalyst to start bringing consensus up for 2007. Reiterates OW rating and top pick status on ASML from a near-term cyclical and secular perspective.

ASML provided C4Q06 order guidance or 65 or more units. Firm believes ASML is likely to receive initial volume orders (i.e., new customers) from both Nanya and Toshiba in C4Q06, which should drive overall orders into the 80 unit range, enough for a positive pre-announcement. Feedback from Japan indicates that the Nikon immersion tools are running slow and ASML is likely to establish a decent initial volume position at Toshiba, which needs to place orders now to enter volume production for Flash in the 55nm range using immersion in mid 2007.

In thei view, ASML shares are undervalued and the company's strong business model is not fully reflected in the stock price. ASML shares trade at 13.3x firm's C2007 EPS estimate of EUR1.52/$1.90 (assuming a 1.25x exchange rate) versus group average of 14.6x, a discount that they believe is unwarranted.

Notablecalls: This call was actionable yesterday. If indeed you decide to play it, keep it on a tight leash.

Calls of Note Part 1

- RBC Capital notes the fourth-quarter mobile devices sell-thru indications remain favorable and they are increasing their unit assumptions for Motorola (NYSE:MOT) from 62M to 62.5M units. However, the mix of handsets may not be tracking towards firm's original expectations and they are reducing their ASP assumptions from $138 to $134. Subsequently, they are adjusting revenues for 4Q06 from $12B to $11.9B vs. consensus of $12B. EPS remains unchanged at $0.38 vs. consensus of $0.39.

With price driven growth likely to remain a persistent theme going forward, they will be utilizing a lower forward-multiple for the wireless-handset vendors. Firm's new price-target for Motorola decreases from $26 to $28 or 18x CY07 earnings. Growth from emerging-regions, a methodical-ramp in WCDMA, and a greater- acceptance of mid-tier and low-end phones may limit the expansion of mobile-device ASPs as we enter 2007.

Firm recently surveyed 200 retailers across the U.S. via telephone and the data points to strong-demand for wireless phones as we approach the holidays. The popular-phones for Motorola are the RAZR and SLVR with price often cited as the primary factor after brand. Thus far they believe order and shipment trends for Motorola remain strong; it's the mix that concerns the firm. The venerable RAZR, now over two-years old, has moved from a high- end to a mid-range and now to an entry-level phone, priced at $49 with a service plan.

The slide in ASPs for Motorola is not that bad when compared to Nokia, which is suffering from a weak mid-tier product-line and a ramp in emerging-markets, two major-factors impacting ASPs.

Notablecalls: Well, this is exactly what I talked about on Nov 6. The phones aren't selling unless the price is cut in half. Most likely this won't affect MOT's bottom line this qtr, but it will start hurting by Q107. I don't view this as a trading call but it does reinforce my neg views on the space.


The WSJ reports that as utilities Suez (SZE) and Gaz de France hammer out the final terms of their planned €44.22bn ($56.72bn) combination ahead of a key Suez board meeting tomorrow, a rising number of shareholders are threatening to reject the deal, an embarrassing potential outcome for both co’s and the French govt, which helped organize it. In the past few weeks, US and European institutional investors with holdings amounting to more than 15% of Suez's capital have signed individual letters to Suez mgmt to protest the terms of the deal.

Barron’s „Inside Scoop” section reprots that Chmn Owen Kratz at Helix Energy Solutions (HLX) shelled out $2.1m for 70K shares. Helix CEO and President Martin R. Ferron bought 20K shares. He spent a total of $621K.

Monday, November 20, 2006

Analyst out on MRU (UNCL)

Analysts commenting on UNCL's earnings report, released last week. Sanders Morris Harris notes that the greater than expected loss was attributable to higher expenses, particularly advertising costs, which does not concern the firm too much b/c these expenditures are necessary investments in building the brand. More importantly, the MyRichUncle brand is gaining appeal among students leading to increasing loan originations. Thanks to solid business in Oct and Nov, UNCL now has over $100m in private loans, which is enough to securitize. According to ThinkEquity mgmt said it plans to do its first securitization of approximately $120m in loans in the MarQ. Firm ests this securitization will take place early in C'07. Think introduces their F´08 EPS est of $0.28. Both SMH and Think continue to rate UNCL shares as a Buy with SMH tgt at $9.

Calls of Note Part 5

Merrill is raising their 12-month price target on Research in Motion (NASDAQ:RIMM) to $165 from $135 on stronger than expected trends in RIM's new consumer Pearl smartphone. S

Firm expects an imminent launch of the Pearl at Cingular, with some stores indicating shipments as early as this week. Cingular is largest US wireless carrier, and Pearl launch could support F4Q (Feb) outlook.

Pearl's thin form factor is a major shift from RIM's previous bulkier models, and they believe it is creating a strong buzz in Europe. IDC projects Western Europe smartphone sales to grow at 38% CAGR till 2010, ~1.4x faster than the 28% CAGR for overall market. Over 14 European carriers have launched the Pearl incl. Vodafone, O2 and T-Mobile.

ML believes RIM has been more aggressive in promoting low-price mobile data plans for consumers vs. its hardware-only rivals. T-Mobile's Pearl data plan at $19.99/mo is among lowest in the industry; they expect similar aggressive mobile data plans at other carriers.

CY08 pro-forma (ex-ESO) EPS estimate goes to $5.22 (vs. $4.86 previously). Maintains Buy.

Notablecalls: UBS beat ML by a couple of days, raising their tgt to $160 on Nov 16. The stock has doubled since August and I think that if today's tgt raise gaps the stock up more than a point one should be looking for a fading oppy.

Color on news: Monster Worldwide (NASDAQ:MNST)

Couple of firms commenting on Monster Worldwide (NASDAQ:MNST) after The Wall Street Journal reported over the weekend that Yahoo (which owns HotJobs) is close to an alliance that with enable 6 newspaper companies (that own >100 papers) to sell Yahoo/HotJobs job postings to help wanted customers.

- UBS believes alliance could hurt Monster by adding competition. Cynics may say it's too soon to say alliance will impact market share mix, but success of Careerbuilder (owned by Tribune, McClatchy, Gannett) makes us more concerned. Since newspapers bought CareerBuilder in '00, its rev share of online recruiting space has risen from what wthey think was <10% to rival MNST's; they think MNST & CareerBuilder now have about 20% share, versus <10% for HotJobs.

They worry alliance could hurt Monster's effort to add more local/small business customers. Firm estimates that small business customers contribute only about 40% of Monster's revenue now; but, they think this customer base will make or break Monster's growth story given that the Enterprise segment of the market is maturing.

UBS is leaving their estimates unchanged. However, this announcement does add another element of caution to Monster thesis; they were already cautious based on concerns about labor market slowdown. Maintains Neutral and $49 tgt.

- Wachovia notes the news also further validates their belief that a YHOO purchase of MNST is unlikely. They view this as a modest negative for MNST as it has hoped to partner up with mid-market newspapers.

Given MNST's desire to expand its local presence, the firm views the potential YHOO agreement as a negative in the sense that 4.6M of daily circ. & potentially 1.2M help wanted related unique online visitors will be moving to a competitor with a 5-yr deal. Firm assumes YHOO gave the newspaper co's better economics given its position as the #3 player. It also suggests newspaper co's are willing to partner with Internet co's which may have been viewed as "the enemy".

Maintains Mkt Perform and $38-$40 valuation range.

Notablecalls: Expect to see moderate selling pressure in MNST today. I was negative on MNST on Sept 29, calling for extended weakness. Obviously, I was wrong. Grain of salt anyone?

Calls of Note Part 4

- Merrill's Joe Osha notes they had a chance to spend some time with Analog Devices' (NYSE:ADI) CEO Jerry Fishman following the publication of results last week. Firm was interested in drilling down on the potential for margin improvement at ADI, and they also questioned Fishman about how the competitive environment is changing.

In some ways, ADI looks like a tempting investment. There's plenty of cash flow and an obvious set of potential improvements. Management has been suggesting for two years that something positive is in the works on the money-losing DSP business. Simply waiting for things to get better is an easy route to take.

It is not, however, a strategy that's likely to work in ML's opinion. As they work through the numbers, it's hard to find any margin improvements that aren't in their estimates, and they see little evidence that change is coming. Firm also notes that ADI is no longer outgrowing the industry in either the data converter or amplifier markets.

At 13.6 EV/2007 EBITDA, the stock looks too expensive for a buyout, and it's also expensive relative to its peers. Even crediting ADI with sustained 10% growth and 26% GAAP operating margins, ML's fair value model suggests a normalized fair value of $34. They don't see investors making money from here. Maintains Neutral.

Notablecalls: I'd be tempted to put out a small short position on ADI following the call. Just because I feel there are too many longs already in it and ML's call will leave them somewhat uncomfortable.

Calls of Note Part 3

- Merrill Lynch notes theyrecently met with several service providers and equipment vendors in Asia and came away positively about PMC-Sierra's (NASDAQ:PMCS) growth prospects in 2007. China appears set to rollout 3G, and trends in FTTx in Japan and Korea are encouraging. Firm continues to believe that the recent decline in PMC's telecom business is related to a temporary inventory correction rather than any structural issues and expect street estimates to begin to move higher in the next 1 - 2 quarters.

Most service providers and equipment vendors in China expect 3G licenses to be granted in 1H07. PMC has about 15% exposure to the China wireline and wireless infrastructure markets, and supplies to leading Chinese OEMs Huawei and ZTE. While it's unclear how the technology landscape (WCDMA vs. TD-SCDMA) will emerge, PMC's components are mostly technology agnostic.

Firm met with NTT, SoftBank and KDDI in Japan and came away positively about the prospects of FTTH in Japan. They think the recent weakness at Passav is primarily related to excess inventory at NTT and expect Passav to rebound in Q1. Korea Telecom is also evaluating FTTH and is likely to begin its rollouts sometime in 2007, which could drive upside to our current estimates. Also, recent esults from NTAP and HP suggest that the storage market remains healthy.

Reits Buy and $10 tgt saying they expect the stock to move higher over the next few quarters from a combination of estimate revisions and multiple expansion.

Notablecalls: Think ML's Srini Pajjuri is making a good trading call here. Would buy the stock here with a $0.15 stop. Could be a half a pointer in the making.

Calls of Note Part 2

- Stifel notes they would use any weakness in MGIC Investment Corp (NYSE:MTG) shares stemming from a negative article in Barron's as a buying opportunity, as they see limited downside (an estimated 13%), even if the bearish case laid out in the article comes to fruition.

In short, the firm sees little new in the Barron's article and would summarize the bearish case presented as less one on MGIC specifically as on U.S. housing, as the key seems to be that the author expects that "the current downturn in the U.S. housing market promises to be no ordinary correction," though this seems to be taken as a given rather than the forecast that it is.

Firm's investment thesis is based on the following factors: 1) recapturing of market share vis- -vis piggybacks, 2) rising persistency, 3) a continued return of excess capital to shareholders, and 4) that MGIC's insured portfolio is less risky than the overall mortgage market and appears decently positioned to weather the current U.S. housing market downturn. As mentioned in the article, current results, especially for 3Q06 support their thesis, especially in regards to top-line growth.

Firm's EPS estimates, which assume deterioration in housing credit though not to the extent implied in the article, remain unchanged at $6.75 and $7.20, respectively. Target price is $80 or 1.4x y/e 2007 book value estimate of $58.38, toward the low end of the historical P/BV range.
Maintains Buy.

Notablecalls: MTG is a recent favourite of the shrinking short community and I guess they talked Barron's into publishing a negative piece on it. Depending on how low the stock opens this AM, I'd be tempted to play it for a bounce. Short interest stands at around 8%.

Calls of Note Part 1

- Citigroup notes the closure of the SanDisk (NASDAQ:SNDK) and mSystems transaction does not change their view of near and long-term share price prospects for the new SanDisk entity. Yet, 4Q06 end demand has been largely uninspiring with October's US retail sell through data for cards, drives and MP3 players sub-seasonal and with SanDisk observing bifurcated card and MP3 market share trends. On the other hand, SNDK has reiterated its OEM-centric handset card business is constrained by tightness in the assembly and test part of its extended supply chain.

While evidencing solid demand pull, this could also be an indication that competition is heating up in this secularly advantaged end market given increased handset card controller output recently at Silicon In Motion. As spot prices have drifted steadily lower in the past month SNDK's shares have steadily lagged the market, now down 12% QTD versus a 6% gain by the SOX. Looming 1H07 seasonality is likely to discourage a sustained rally, though a"catch-up" trading rally into the low-50's is possible into SanDisk's CES presentation, especially as valuation now appears low. Further out, 1H07 pricing seasonality sustains risk to the $40 level, though 12- month reward potential appears to the mid-60s. Reiterates Hold rating on SNDK shares.

Notablecalls: CES will take place early Jan resulting in several new product announcement in the portable EC space. That may indeed drive the stock higher. Not a high conviction call.


The WSJ reports that several buyout deals to be announced this morning. Blackstone Group last night was near a $20bn takeover of Equity Office Properties (EOP) as Wall Street wrapped up one of its biggest days of deal making ever. If completed, the proposed effort to take Equity Office Properties private would be the largest such transaction in history, and possibly the largest real-estate deal ever, after factoring in the company's $16bn in debt. Even so, it was just one of a parade of multibillion-dollar deals expected to be announced by this morning. They include a $25.9bn takeover of mining concern Phelps Dodge (PD) by Freeport-McMoRan (FCX); a $3.3bn takeover of U.S. Trust, the private-banking arm of Charles Schwab (SCH) by Bank of America (BAC); and a $2.5bn agreement by Russian steelmaker Evraz to acquire Oregon Steel Mills (OS). Last night, Wall Street bankers were discussing the possibility of still more major deal announcements today.

„Heard on the Street” column discusses Syngenta (SYT), which bets that if it builds the right genetically modified seeds, profits will come, and some investors like its chances. It offers a cheaper way into the booming $56bn agricultural-chemical industry than its biggest US rival, Monsanto. "There are some stocks in which you look out for performance over two and three years, and this is one of them," says Madelynn Matlock, who manages $270m for the Huntington International Equity Fund.

Sunday, November 19, 2006

Barron's Summary

Barron’s cover discusses NYSE (NYX), whose investors love its electronic initiative and planned Euronext merger. Trading at more than 40x expected ‘07 earnings, NYX stock already is discounting massive efficiencies from the electronic transition and Euronext merger. It's trading based on hoped-for ‘08 earnings of maybe $3-4 a share, and more farther out. Investors thus are giving the exchange credit for winning battles it hasn't yet fought. They think CEO John Thain is playing a multiyear chess match and is thinking several moves ahead, the Euronext deal, the rollout of US derivatives listings, trading bonds and their derivatives, building a "dark pool" internally, an Asian linkup, maybe even having the Archipelago platform handle most NYSE-listed volume some day. They're convinced he's underpromising and ready to overdeliver. With the stock where it is, a lot needs to break right. And it only will if a better Big Board rises as its trading floor's grip on the mkts fades.

A deal could bring Coca-Cola Enterprises (CCE) $27 a share, a price about a third above its recent stock quote, while helping Coca-Cola to carry out a cohesive growth strategy.

It's generally gotten easier for investors to find, evaluate and trade bonds. Cautious investors should consider munis, and the paper of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

MGIC Investments (MTG) stock, at 61.50, has been climbing as current trends favor mortgage insurers. But some skeptics see a rise in claims that could cut earnings in half, prompting a steep selloff in the shares.

The shares of DuPont (DD), which went nowhere for most of this decade, have begun moving up this year. Recently at 47.48, they could climb 15-20% in the year ahead.

As the dollar fell earlier this decade, some feared a meltdown. Instead, the buck has bottomed, and looks ready to rise in the year ahead by at least 5% against other currencies.

“The Trader” column suggest that the yellow pages business Verizon Comm. (VZ) is spinning off may merit a second glance. Shares of the spinoff, called Idearc (IAR), were distributed as a dividend after the mkt closed Fri, with stockholders receiving one Idearc share for every 20 Verizon shares owned. Idearc stock will begin trading Monday. Idearc shares were trading late last week for about 26.60 on a "when issued" basis. Shawn Collins, of Citigroup, reckons they could be worth about 33 based on various metrics. Idearc shares could fetch between 30-35 in a leveraged buyout, he reckons, or between 28-39 based on a multiple of 8-9x ‘06 EBITDA of about $1.637bn.

“Technology Trader” section discusses Medtronic (MDT), St. Jude (STJ) and Boston Scientific (BSX), whose shares are down 15%, 29% and 33%, respectively, since Dec05. Now, with the stocks trading at historically low multiples of about 20x next year's profits, a fair number of professional health-care investors are looking at quarterly reports for any sign of a demand uptick. Sanford Bernstein analyst Bruce Nudell suspects that if Medtronic's sales of defibrillators (ICD) show any strength, a thrill would run through its shares and those of its rivals. "Ppl are not concerned with the long term," says Nudell of his conversations with the buy side. "So, if it's a positive quarter, these stocks should go up." The valuations of these device stocks reflect low-growth expectations. Any hint of faster sales gains -- in the low teens, say -- should spark investors to pay a little more for them. Others stocksa mentioned include: CAMH, JNJ and CONR.

Manager top holdings highlighted: BRKA, AXP, ENR, JNJ, FDX, BUD, GE, AFL, SU and FAF.