Wednesday, January 31, 2007

Calls of Note Part 2

- ThinkEquity is positive on GigaMedia (NASDAQ:GIGM) saying recent marketing meetings with management in London left them even more enthusiastic about the fundamentals of GigaMedia's core businesses and growth potential. Its investments in marketing for CESL in Europe, numerous strategic initiatives in Asia (intended majority ownership of T2CN, investment in Southeast Asia-focused Infocomm, high-profile game license HellGate London), and future growth initiatives (casual online sports games in China, real-money Mahjong, expansion in Japan) position GigaMedia well for 40% annual growth over the next three years, in firm's view. They are increasing their FY07 and initiating FY08 estimates as well as raising price target to $15 from $13.

GigaMedia is expected to report Q4:06 earnings within the first two weeks of March. The firm is comfortable with their estimates of $28.5 million (+142% y/y, +18% q/q) in revenues and $0.13 (+225% y/y, +18% q/q) in EPS.

FY07 estimates increase to $141.2 in revenues (+54% y/y) and $0.52 in EPS (+58% y/y). For FY08, they are initiating estimates of $183.2 in revenues (+30 % y/y) and $0.70 in EPS (+33% y/y).

Notablecalls: Chart looks strong and Think's been right on GIGM so far.

Calls of Note Part 1

- Morgan Stanley is out on Under Armour (NYSE:UA) noting that in their first three months of coverage, they've grown incrementally more constructive on UA. They still firmly think that gross margins will begin to come under pressure over the next 12 months.

But where they're more positive is how far ahead UA is as it relates to SG&A investment and infrastructure-build compared to other early cycle hyper growth stories. Firm now thinks it will have more cost levers to pull to maintain margins in the event of GM pressure than they previously assumed. That said, firm's sense is that a 55x p/e multiple is perhaps plausible when earnings are driven by sales + GM upside, but this multiple gets to be a stretch when the story turns into sales + SG&A leverage. Their $33 target (based on dcf model with UA following the path of an early stage Nike) is arguably low in light of potential for better SG&A leverage, which they will revisit after Thursday's earnings

The last 2 quarters UA beat EPS by nearly a third and the stock went down on both days. Four quarters ago UA beat by only 3% and the stock lost 23% in a day (off of a much lower valuation
base). Clearly, the company needs to beat meaningfully to avoid going down. Firm's sense is that UARM needs to beat a $0.30 number versus the Street at $0.25 -- which they think is entirely possible this quarter.

Maintains Underweight.

Notablecalls: Not actionable but good to know category. Shows you where the expectations stand.

NutriSystem (NASDAQ:NTRI) - bounce candidate

Citigroup comments on NutriSystem (NASDAQ:NTRI) following guidance provided last night. The firm notes Q406 EPS guidance is 50-53c, above consensus of 47c. 4Q rev. is expected to be $131-133mm w/ 159k custs vs. FC of $128mm and guidance of over 155k.

NTRI gave 1Q07 rev. guidance of $200-210mm vs. FC of $214mm and firm's est of $203mm. NTRI guided for 1Q07 new direct customer growth up 23%-32% vs. firm's est of up 15%, which they view favorably. However, mgmt provided 1Q07 EPS guid. of 82c-86c vs FC est. of 94c. As discussed in yesterday's call note (scroll down), they expected mgmt to provide conservative guidance that it could meet or beat.

Citi notes they are very confident in the company's longer-term prospects and believe its business model remains intact. Raising '06 eps by 6c and lowering '07-'08 eps by 10c and 12c, respectively to reflect guidance. Lowering target price by $3 to $92.

According to the firm the best indicator of the full year business for a diet company is January sales -- that month typically sets the tone for the remainder of the year. The firm had been anticipating y/y sales growth of 38% in 1Q07 to $203 million, versus consensus revenue growth of 46%. Based on company guidance issued after the close on 1/30/06, they are now expecting revenue growth of 43% in 1Q07. The critical metric will be new customer acquisitions. The company provided 1Q07 guidance for 290-310k new customers, or at least 23% YOY growth, which compares with Citi's previous estimate for 270k new customers, or 15% YOY growth. The company's guidance assumes healthy growth potential for the company.

While NTRI earnings are expected to grow 30% longer-term, the stock (using aftermarket price of $46) only trades at 16x '07 EPS estimates. This compares with Weight Watchers, a mature company with a 12% long-term EPS growth rate according to First Call, which trades at 22x consensus '07 estimates. Additionally, NTRI has a 30% short interest, which they think assumes new customer growth deteriorates in the near-term (2007 1Q diet season).

Maintains Buy.

Notablecalls: I suspect NTRI makes a good bounce play here. Would be an opportunistic buyer around the $46 level. The stock declined 6 pts following Citi's pre-market comments yesterday and then another 6 pts in after hrs action following the guidance release. The guidance for Q1 looks conservative, making the valuation quite tempting. Notice how Citi's tgt still stands at $92, implying 100% return. The stock's cheap even if the co can grow it's bottom line 20-25%.

Color on quarter: SiRF Tech (NASDAQ:SIRF)

Several firms are commenting on SiRF Tech (NASDAQ:SRIF) after the co reported stronger than expected results and guidance:

- Morgan Stanley notes that excluding a lower tax rate, Q4 adjusted EPS were $0.01 above their $0.26 estimate and $0.02 above consensus. Revenue of $74MM easily topped firm's$70MM estimate and the company gave seasonal guidance (down 8%-12% Q/Q) for Q1. MSCO has revised their estimates higher (from $0.80 to $0.95 for 2007) as the advertising and price elasticity in the PND market was even greater than they noted in their November 28th upgrade report.

The strong Q4 results and SiRF's news flow at the upcoming 3GSM conference (February 12-15) is likely to keep a bid in the stock in the near term. However, the fact that competitive news flow is likely to continue to increase, Q1 should be seasonally slow, and the overall semiconductor industry business environment is challenged, as well as uncertainty about the timing associated with the share loss at TomTom will likely keep SiRF bound in a volatile $24-$30 range, in their view.

Maintains Equal Weight.

- RBC Capital is increasing their estimates and price target and maintaining Outperform rating on SIRF. The stock traded up about $4 in after-hours after the company beat 4Q07 estimates and guided better 1Q07 and 2007 revenue. The whisper expectations were lower than estimates due to share loss at TomTom.

The company guided impressive growth in spite of the strongest headwind of market share loss at its largest customer. This demonstrates that the company has broad based customer exposure and can continue to grow at a significant rate in spite of loss of a few sockets here and there.

Gross margins are still expected to be within its target model of 52% to 56%. There have been several claims and speculations about GPS chipsets prices falling from current $7 level to $2 suggesting significant decline in gross margins for SIRF. Q1 guidance and management's comment give the firm confidence that the company can maintain high gross margins though broad product portfolio offering. They continue to model at the high end of the target range.

Theyare increasing 2007 estimate from $1.06 to $1.18 (consensus was $1.00). Price target increases from $34 to $38 based on 32X 2007 earnings estimates.

Notablecalls: The problem with SIRF is that most firms already have Buy ratings on the stock. Following a 16% move in after hrs, I suspect tgt and est raises are not enough to keep the stock moving. There will be additional competition in the space in 2007 and SIRF does have huge customer concentration issues. I would be looking for cracks in buy interest after the open.

Take my calls with a pinch of salt. I've gotten some calls terribly wrong over the past couple of days. ATHR and GYI are probably the best examples of that. Somewhat tired, that's all. Hope no one got hurt.

Color on quarter: Sandisk (NASDAQ:SNDK)

Several comments on Sandisk (NASDAQ:SNDK) after the co issued strong Q4 results but dismal guidance:

- Merrill Lynch notes SanDisk delivered a solid quarter, but management's outlook was as shaky as the firm can remember. Industry oversupply in the first half of the year has limited any visibility into pricing for the year. ML has lowered their 2007E adjusted EPS estimate from $2.50 to $1.80, and our GAAP estimate from $2.10 to $0.88. Given that NAND prices still have room to fall, they see no need to upgrade SanDisk yet. As is so often the case, the stock will probably over react to intermediate-term problems despite the merits of owning it longer term. On the much lower numbers, valuation is not that compelling either. Firm's rating stands at neutral.

The pricing implosion at SanDisk has negative implications for the intermediate term, but enormously positive implications for the longer term. The firm notes they wrote late last year that they expected NAND flash to be at $1 per gigabit by the end of 2007, at which point solid-state drives (SSD) for mobile computers might start to become a reality. They are below $1 a gigabit already, and they think price could be down to $0.50 a gigabit by the end of the 2007. At that point, the prospect of $200 50GB storage devices ($0.50 x 8 x 50) becomes quite interesting.

- Citigroup says that against the backdrop of weak semiconductor company 4Q06 results, SanDisk's top and bottom line strength, albeit with blemishes, surprised favorably. However, and more importantly for the shares, a slew of unexpected outlook negatives, with few offsetting positives: 1) produced dramatically lower 1Q07 revenue and EPS, 2) decreased conviction in a mid-2007 product gross margin rebound, 3) added fresh concerns about the merits of the mSystems acquisition (just closed in late-November) and 4) cast doubt on the marketing muscle behind SanDisk's own MP3 and USB retail product execution ahead of new product launches in 2Q07. Further, SNDK's own aggressive production ramp through 2007 (F3 Dec, 2006 WPM of 70k exceeded Citi's 50k estimate; capacity now targeted at 136k WPM vs. 110 previously), adds to concern about excess industry production. Overall, their new 2007 and 2008 revenues each decline by 12% while EPS estimates decline 45% and 26% respectively. Similar declines to Street estimates are likely with little compelling evidence to assert confidently that a firm bottom has been set in firm's forward estimates.

They remain cautious on SNDK shares, seeing little reason to get more aggressive near-term in what is typically a (still distant) second-half play (albeit with powerful though well-known secular catalysts). A trough EPS multiple of ~16x on our 2008E estimates implies a valuation range of $35. Next week's MU analyst day seems likely to contribute to near-term share volatility, as sector supply growth concerns rekindle and as Lexar retail market share recapture concerns begin to brew. Thus, SanDisk's own February 26th analyst day may be the next potential catalyst in refurbishing now-tarnished investor confidence. Time, or the shares falling to below $35, could potentially cause the firm to reconsider their Holdrating and potentially increase interest in the shares. Target goes to $46 from $52.

- Deutsche Bank maintains their cautious stance on SNDK as they believe it will continue
to prove a prudent position. Highlighting the currently treacherous NAND flash environment, SNDK declined to give any guidance on full-year ASPs, GMs, or License & Royalty stream. Given this lack of visibility it is hard to see significant buyers stepping up to the plate (unless enticed by hopes of a technical rebound). Firm lowers theirtarget price to new SoTP value of $38 and remains on the sideline until they see a material discount to this fair value (given high beta).

SNDK moving away from giving bit growth and ASP guidance: They view this as negative as it significantly reduces Investors'/Analysts' ability to wrap their arms around the story. This is after all a memory company - bit growth and ASPs are key factors in modeling the business.

$300m stock buy-back approved: Given the high level of dilution through stock option grants, they believe this is a step in the right direction by the company's board. However, the buy-back is not large enough to signal that the board believes stock to be significantly under-valued.

- Goldman Sachs says they had hoped that the company would commit to scaling back its capacity additions, which would have allowed for NAND supply/demand dynamics to improve in 2H2007/2008. However, management appears committed to adding capacity, despite a continued very weak pricing environment. While they expect the stock to find a near-term trading floor in the upper $30/$40-range, they do not see any catalysts to drive the shares higher in the near-term in light of the company's unwillingness to scale back on capacity additions. The firm therefore recommends that only the most aggressive investors buy the stock today. That said, they continue to recommend a long SanDisk/short SPE pair trade, as they believe SanDisk is pricing in weak NAND fundamentals while the SPE stocks are not.

Notablecalls: I think SNDK is headed lower in the intermediate (1-3 month) term. How much would you pay for $1.80-$2.00 EPS power in 2007? 20x? Probably less, something more closer to 16x. Luckily for the holders of common, SNDK's price to book still stands strong. I have no view on what the stock will do in the very s-t. Suspect there will be a bounce. But that's a low conviction call.

Paperstand (BFAM, CNX, PPP)

The WSJ's "Heard on the Street" column discusses Bright Horizons Family Solutions (BFAM), sayin that for investors, the co's share price has been a test of faith. It recently posted lower sales, which weighed on its once-highflying stock price. "It's almost analogous to a water-skier coming around a corner," says Tony Sutton, of Putnam Small-Cap Growth Fund. "The line goes slack for awhile and then you take off again." The stock is trading at 20x consensus EPS est for the next 4 qrtrs. Like other service co's, BFAM's stock could suffer if the economy slows and businesses cut back on spending. Also, the fragmented nature of the child-care industry means competition has room to grow. Yet some investors expect Bright Horizons to keep gaining at a brisk pace. Its leadership position, they say, is bolstered by its name recognition among the more than 40K, mostly private child-care co's in the US. Its biggest rival, Knowledge Learning operates 120 centers, compared with Bright Horizons' 630. "Over the next 5 years, they're going to have the wind at their backs," says Kent Gasaway, of Kornitzer Capital Mgmt. "Co's really need them with the tight labor mkt," he adds. Kornitzer, with about $4bn in assets, owned a 2.5% stake in Bright Horizons as of Sept. 30, and it remains a "core holding," Mr. Gasaway says.

Barron's Online highlights Consol Energy (CNX), saying that investors might want to think about fueling their portfolios with shares of the co. Consol is unusual among large US coal co's for its natural-gas production business. And its already-strong operating margins should get a boost as utilities continue to add emissions equipment that encourages consumption of Consol's sulfur-laden but more energy-efficient coal. After unseasonable weather in '06, prices for coal and natural gas fell. With projections for production cuts this year, sentiment for the sector has waned. But the shares, 30% below their 52w high, reflect bad news. And with Consol locking in strong prices for '09, the shares look like one of the more attractive plays in the coal sector this year. "Consol right now is the only coal co synched with what utilities are looking for: long-term contracts for coal with lower transportation costs and more heat per ton," says Ian Synnott, of Natexis Bleichroeder. "That it is trading at a discount to peers is irrational." Despite a US focus on fossil-fuel alternatives, and the likely addition of nuclear plants down the road, coal remains America's greatest homegrown energy source. About half of US electricity generation is powered with coal. "If we are ever going to get serious about energy independence, coal to liquids to replace diesel fuel is huge," says David Williams, of Excelsior Value & Restructuring Fund. "We have 200 years of coal reserves in the US and...we will be using more coal."

"Inside Scoop" section reports that Third Avenue Mgmt disclosed a 6.2% ownership stake in Pogo Producing (PPP), or 3.6M shares, up from the 5.4% stake, or 3.16M shares, it had disclosed at the end of the 3Q. Third Avenue's glove-slap comes less than two months after another hedge fund, Third Point, rattled the cage at Pogo. In a filing, Third Point's CEO, well-known activist investor Daniel Loeb demanded that Pogo initiate action to sell itself in whole or part, and stated that he intends to wage a proxy battle at Pogo's '07 shareholder meeting to elect a new majority slate of directors. Ben Silverman, of, says that "Third Avenue's filing certainly helps Third Point's cause," b/c, combined, the 2 firms own a 13.4% stake in Pogo. "Moving forward, it will be important to see if they can get other firms on board to try to force some change here."

Tuesday, January 30, 2007

Calls of Note Part 2

- Citigroup notes that despite modestly negative data points, they still like NutriSystem's (NASDAQ:NTRI) stock over the next year. These negative data points could lead to near-term volatility: 1) website traffic showed moderating (albeit decent) growth; 2) firm believes the retail test w/ GNC is performing under plan; and 3) there is increased competition and copycat programs (particularly regarding the men's plan). While they see near-term volatility, checks indicate that men's program is doing well and though it is still in the early stages, NTRI's senior program is gaining some momentum. In 1Q07 as well as the full year '07, Citi expects 10-20% new customer growth. They would also expect a 15-25% increase in CAC, as they think marketing rose at a greater rate due to increased marketing spent on men and seniors in addition to the core women's business. Firm thinks sell-side analyst estimates may be at the upper end of what the company can achieve (at 36% revenue growth for '07), but investors are not expecting much (19x '07 consensus EPS and 30% short interest) despite 30% long-term EPS growth.

Maintains Buy but lowers tgt to $95 from $105.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 1

- Piper Jaffray notes Apple's iPhone (4GB for $499 and 8GB for $599) should be available in June 2007. Because this device represents a new market segment for Apple, its release raises several important questions ranging from the economics of the Cingular/Apple partnership to the iPhone's addressable market. Here's a selection of some of the questions answered by PJ:

1. What Are The Economics Between Apple And Cingular? While this information is mostly unavailable, the firm believes Cingular is not subsidizing the iPhone but may be reducing service plans to iPhone customers. Cingular has confirmed that there is no revenue sharing plan in place from added iTunes Store users because of the iPhone.

2. Will The iPhone Be Available Through Other Carriers? Eventually yes, however, there is a multi-year exclusive deal between Apple and Cingular iPhone. It is unclear whether this deal applies to this iPhone model only, or several future iPhone models.

3. How Quickly Will The Price Of The iPhone Decrease? Industry trends show that handset prices decrease quickly. At launch the Motorola RAZR retailed for about $500 and one year later the price had decreased 50% to $250 (note: prices listed do not include rebates or subsidies). And while wthe firm feels the price will decrease with time and with future models (as Apple has indicated), they don't feel the price decline curve of the RAZR is an accurate measurement. It is more likely thatthe iPhone will approach the $399 mark and future models will address more price-sensitive markets.

4. What Are The Gross Margins Of The iPhone? PJ believes that Apple timed its entrance into the handset market with precision. While iPod margins are decreasing, firm's analysis of Palm's Treo devices indicates about a 30% margin, which they also believe is an accurate estimation for the first iPhone models longer term, but likely the initial iPhone model has a greater than 30% gross margin.

5. What Is The Addressable Market For The iPhone? Near term: Cingular has 58m subscribers, of which the firm estimates about 30% (14m) own iPods and about 10% own phones >$300 (5.8m). Long term: according to IDC estimates, there were 201.4m wireless subscribers in the U.S. and 1.8b worldwide by the end of 2006.

Maintains Outperform and $124 tgt on AAPL.

Notablecalls: Not actionable but good to know category.

Color on quarter: Getty Images (NYSE:GYI)

Couple of comments on Getty Images (NYSE:GYI) following results:

- Piper Jaffray is upping their tgt to $50 from $45 after Getty reported a better-than-expected Q4 performance with improved growth in single image Royalty Free volumes as well as strength in Editorial, Film, and Micropayment. The one area for concern in the quarter is Rights Managed imagery (40% of revs), which increased just 1% y/y and the firm believes continues to be impacted by a softening offline ad environment. While they are incrementally more positive given the stabilization in RF, Q4 growth remained modest at 6.5% y/y (currency neutral) and GYI maintained its guidance for mid-single digit revenue growth in 2007. Also, while there could be some benefit from new initiatives in 2007, they would like to see signs of traction against these initiatives before getting more constructive. As such, the firm is maintaining Market Perform rating.

- JP Morgan notes that given the low expectations going into the quarter, they expect the shares to rally, continuing yesterday's rise following the news of Blum Capital's 5% stake. Firm maintains Neutral with a positive bias given GYI's undemanding valuation.

- Deutsche Bank thinks the stock at $46 (after hours trading) the stock could give up some of its gains, from profit taking. The stock already moved up 5% yesterday, thanks to the Blum investment, which drove speculation of a large corporate transaction and/or management shake up. They view the Blum investment as a positive building a base of long-term shareholders. Having said that, there are a few potential catalytic events to look out for, such as a potential settlement with convertible holders, positive Corbis update (mid Feb) and Jupitermedia earnings. In addition, there could be potential accretive transactions such as acquisitions and significant stock repurchases in the coming quarters. As the firm has said in the past, they think the company is underleveraged (less than 1x net debt/EBITDA) and could take on additional debt in the coming quarters. Near term, the company still needs to deal with the potential convertible default and the stock option overhang.

Maintains Hold and ups tgt to $45 from $43.

Notablecalls: I suspect the stock will have trouble hanging on to the $46.50 level it reached in after hrs. It needs a tier-1 upgrade to stay there and it looks like there won't be one.

Color on quarter: Atheros Comm (NASDAQ:ATHR)

Couple of comments on Atheros Comm (NASDAQ:ATHR) following results:

- Piper Jaffray notes they were encouraged by strong sales of 802.11n products, which accounted for nearly 23% of Atheros' WLAN revenue during Q406. In fact, Atheros indicated 802.11n sales were above its original expectations. Further, Atheros indicated it expects 802.11n shipments to represent its primary growth driver during 2007, despite expectations for a modest seasonal decline during Q107. Given Atheros' early lead in this market, they believe the company is well positioned to benefit from the transition to 802.11n products over the next few years.

The firm was also encouraged the company expects to grow sequentially across all lines of business in Q107, given the March quarter is normally seasonally weaker. Based on stronger-than-expected revenue growth as well as the recent closure of the Attansic acquisition, they are adjusting their 2007 estimates from $0.91/ $371.8M to $0.91/$403.4M, and raising 2008 estimates from $1.10/$446.4M to $1.14/$479.9M.

Maintains Outperform and ups tgt to $28 from $26.

- Morgan Stanley is also very positive on ATHR saying that from a product perspective, the revenue performance was driven by strong sales of the company's 802.11g and 802.11n products, which increased sequentially by 24% and 117%, respectively, and more than offset a sequential decline in sales of the company's 802.11a/g products (which are being cannibalized by the market's transition to 802.11n).

Firm notes they believe that Atheros will likely continue to upside revenue and EPS estimates going forward, and given the weak environment currently affecting the overall semiconductor industry, this outlook is the polar opposite of what has been happening with virtually every other company in their universe. Since last summer, they have reduced 2007 revenue estimates about 3 times on average for approximately 80% of the semiconductor stocks in their universe, and the average decline has been 14%. In contrast, Atheros is one of the only companies where they have been consistently increasing estimates. Furthermore, the firm expects Atheros to continue to grow significantly faster than the average semiconductor company over the next several years, with organic revenue growth (excluding the impact from the Attansic acquisition) of at least 30% in 2007.

While the firm is increasing their current estimates for Atheros, they believe solid upside potential to new estimates still exists. 2007 revenue and earnings estimates have increased to $420 million and $1.00 per share from $375 million and $0.95 per share, previously. Despite its strong performance last year and in the month of January, ATHR remains one of MSCO's favorite stocks, and they expect investors to react favorably to the company's fourth-quarter results and first-quarter guidance.

Maintains Overweight and $33 tgt.

Notablecalls: I'm somewhat surprised by the muted reaction in after hrs. The results are surely worth more than $0.20. I think the stock is headed higher today.

Paperstand (C, GYI)

The WSJ’s „Heard on the Street” column discusses Citigroup (C), saying that in the last 3 months of ‘06, the level of loans outstanding on the Sears cards dropped 13% to $23bn. That reflects a fall of about 20% from the nearly $29bn of loans on those cards when Citigroup bought the business in late ‘03. The Sears portfolio is just one factor that is weighing on Citigroup. After rallying last month, the co's stock price has lost ground amid investor concerns about rising expenses and the performance of other businesses. Last week, the co ousted Todd Thomson, a rising star at the bank who most recently ran its wealth-mgmt business. The bank needs to find a CFO after announcing plans to move Sallie Krawcheck from that position into the spot held by Mr. Thomson. The performance of the Sears card portfolio is tied to the fortunes of the retailer, which was struggling with sales even before Citigroup bought the card business. Sales at Sears stores open at least a year have been falling for years, and the decline has persisted under the ownership of hedge-fund billionaire Edward S. Lampert. "The issue is not profitability. The issue is growth," says Joe Dickerson, of Atlantic Equities. Based on typical industry growth rates, he ests that the Sears card portfolio should have $32bn in loans. Mr. Dickerson has the equivalent of a Hold rating on Citigroup's stock and a 12-month price tgt of $50.

Barron’s Online “Inside Scoop” section reports that Blum Capital Partners, a private-equity firm, spent $23.6M to buy 547K shares of Getty Image (GYI) on the open mkt through Jan. 18, ’07. The investment firm built up an initial stake of about 1.9M shares in the 3Q06 when the stock lost about a quarter of its value. Blum has since boosted its holdings to more than 3M shares, or 5% of Getty's nearly 60M outstanding. Blum's investment in Getty is valued at nearly $133.7M based on today's mkt price. Getty is Blum's fourth largest holding. Ben Silverman, of, notes that as the mkt leader, Getty's pricing model is considered expensive and inflexible compared with smaller players. Getty's beaten-down shares "certainly fits Blum's pattern of using some weakness for position building," Silverman says. He notes that Blum is currently in its third quarter of holding Getty shares and that the firm typically holds positions "for eight quarters-plus." Silverman says that delay "works as a nice hedge" b/c if Getty's result disappoint "they can claim to be an activist after all.

Monday, January 29, 2007

OmniVision Tech (NASDAQ:OVTI) - bounce play

Morgan Stanley is out with a gutsy call saying the 14% sell-off in Omnivision (NASDAQ:OVTI) shares since early December appears overdone as they do not believe conditions in the image sensor market have gotten incrementally worse over the past two months. Firm spoke with three of the top five image sensor vendors last week and they believe Omnivision's prior guidance largely incorporates the current weakness in the market.

Omnivision's October quarter results and January quarter guidance already reflected the negative impact of a mix shift to low end handsets in the broader market that caused problems in C4Q06 for many wireless semiconductor vendors, notably Texas Instruments and STMicro. Mix is the key value driver for Omnivision and the firm continues to believe that Omnivision's mix of low-end and high-end image sensors stabilized in the January quarter, should improve modestly in the April quarter, and could become a meaningful tailwind as the company moves through 2007 and its customers ramp models with higher resolution cameras.

They do not expect Omnivision to suffer meaningfully from the reduction of pockets of excess inventory in the handset supply chain as they believe inventory at Omnivision's customers is relatively manageable, particularly as the company has little Motorola exposure.

Morgan Stanley believes there is minimal downside left in Omnivision shares as expectations are low, the stock is down nearly 70% from its highs, valuation is at an all-time low, and more than 40% of outstanding shares have been sold short. Their target is $18.

Reits Overweight.

Notablecalls: Actionable call alert. While I have been negative on OVTI for some time I think MSCO-s defense here makes sense at least in s-t. I expect the stock to move aggressively upward. Suspect it will hit at least $12.50 today.

Calls of Note Part 5

Bear Stearns is upping their year-end 2007 price target on Wynn Resorts (NASDAQ:WYNN) to $124 from $108, after reviewing their previous sum of the parts analysis that provided the basis for price target. They are not changing their estimates (as they are above consensus for 4Q06 and 2007).

This morning, the firm initiated on LVS with a Peer Perform and lowered rating on MGM to Peer Perform, so why are they viewing WYNN differently? Simply put, they think by applying the same LV Strip- and Macau- target multiples to WYNN derives a much higher share price. Firm views this as a consistent valuation approach within our coverage universe. In addition, they would not recommend having zero portfolio exposure/new money going into the LV Strip and Macau -centric stocks and think WYNN has more upside than the others.

Using target EBITDA multiples of 10x to 12.5x for Las Vegas Strip cash flows & 11.5x to 14x for its cash flows (these are consistent for target multiples that they use for MGM & LVS , the firm believes fair value for to be in the $106 to $142 range, or an average of $124, which implies upside of 15% from current levels.

Additionally, they see several catalysts for WYNN that should move shares higher over the coming months: 1) a likely strong Chinese New Year's Eve (1Q07), 2) a good 4Q06 out of Macau and 3) the February 2007 opening of Spamalot, which should lift entertainment and casino revenues at its
LV property.

Notablecalls: Reminds me of Mastercard (NYSE:MA) from last week. Actionable call alert!

Calls of Note Part 4

- Piper Jaffray reiterates aQuantive (NASDAQ:AQNT) as their top small/mid cap Internet pick for 207. Firm believes catalysts for shares include: 1) strong 4Q results; 2) increasing traction internationally, especially for its agency services; and 3) increased visibility into 2007 estimates and the roll-out of Street 2008 estimates. They believe shares are attractive at 14x 2007 EBITDA vs. 20% LT EBITDA growth and relative to DTAS' acquisition multiple of 16x '07. Firm would be buyers of AQNT shares ahead of what they believe will be a very solid 4Q performance.

Based on recent channel checks, they have increased confidence that aQuantive will report very strong 4Q results, likely exceeding the high end of revenue and earnings guidance. While the firm expects strength across the board in the seasonally strong 4Q, they will likely see the most upside from the Digital Marketing Services segment as checks indicate robust demand for agency services. Checks also indicate that full year 2007 demand is very robust, which increases firm's confidence in their estimates and they believe we will see upside to firm's 17% organic growth estimate for DMS.

Maintains Outperform and $34 tgt.

Notablecalls: May see some buy interest.

Calls of Note Part 3

Couple of interesting comments on MBIA (NYSE:MBI) from tier-1 firms:

- Morgan Stanley notes that in the last minutes of the trading day on Friday, Bloomberg published a story suggesting MBIA will announce a settlement with regulators today, January 29. The article indicates MBIA will pay only the previously reserved for $75 million in fines and penalties to settle all AHERF-related issues, but would leave an independent consultant at the company to further
investigate potential wrongdoing at Capital Asset. MBIA has not commented on the proposed settlement.

A regulatory settlement, as proposed, would be a clear positive for the stock as it would remove significant uncertainty. It would also enable the company to begin repurchasing shares (up to $1 billion). Investors will finally be able to focus on the merits of the underlying fundamentals of the business. However, given tight credit spreads, only single-digit book value growth, and downward pressure on new business written, the firm does not believe the fundamentals are all that strong at present.

If this proves accurate, they would expect the stock to get a sharp short-term lift on the back of heavy short covering. There are more than 20 million shares short, representing 15% of the total.
If the MBI shares rally materially on the announcement, the firm would recommend reducing one's position in the stock.

- Deutsche Bank thinks that should MBIA settle with the Securities and Exchange Commission (SEC) and other regulators today, the stock could get a lift. Some investors that are short the stock may decide to cover, given that the investigations did not lead to MBIA losing its triple A ratings. MBIA is one of the most heavily shorted stocks in the S&P 500. Also, the company is likely to resume repurchasing shares in earnest. They estimate MBIA's excess capital has increased to $1.8 billion. According to news reports on Friday, January 26, MBIA could settle with the SEC as early as today for $75 million, which is the amount the company reserved in November 2005. Firm believes the settlement is likely, given that the company suddenly postponed its earnings release the day before the planned release date and could not provide an explanation for the change.

DB based their $79 target price on 1.45 times projected 4Q'07 book, which is at a discount to the average of 1.5 since the management changes in 1999.

Notablecalls: Having found myself in similar situations, I feel for the shorts. Not a nice way to spend a weekend. Expect a sharp move.

Calls of Note Part 2

JP Morgan is raising their Q1 estimates on ADC Telecommunications (NASDAQ:ADCT) to reflect a more normal 12% q/q decline in revs vs. prior estimate for a 15% decline as they believe Verizon and Deutsche Telekom may have returned to spending on their respective FTTx networks faster than the firm previously anticipated after pausing in 2H'06. They reiterate Neutral rating as they continue to believe order patterns remain inconsistent making visibility a challenge, while ADC's desire to increase exposure to Asian markets through acquisition could increase execution risk.

Verizon may have worked through its FTTx inventory faster than the firm expected fueled by strong sub growth as Tellabs reported ONT revenue grew q/q in its Q4 ending Dec. 31, despite reducing ONT prices by 25% (or more) starting at the beginning of Nov. VZ reports today at 8:30am.

Deutsche Telekom reaffirmed its commitment to its 50-city VDSL rollout in a press release on Sunday and the firm believes spending on the FTTN VDSL rollout may have returned in late December as evidenced by Corning reporting on its Q4 conference call that orders from European customers were stronger than expected at the end of its quarter.

JPM continues to believe ADC needs add'l strong customers beyond DT and VZ and view Bharti and Chunghwa's FTTx plans as modestly positive although its is too early to tell if ADC can secure some of their business.

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

Calls of Note Part 1

Couple of comments on Western Union (NYSE:WU) ahead of results:

- William Blair notes Western Union's fourth-quarter results will not only be the company's first results to show the full impact of the spin-off from First Data Corp., but also will be very closely watched as indicative of the overall health of the money transfer market. This remains a controversial topic, as other money transfer business operators have in their most recent results conceded impacts from price competition, macroeconomic weakness, and immigration-related effects. Firm expects, however, that Western Union will be able to report a stabilizing-albeit weak-environment and that this can be a first step in restoring confidence among investors. The stock's recent performance likely reflects this near-term outlook, but does not yet, in their opinion, reflect the exceptional long-term opportunity that they believe faces the company, especially internationally. Firm believes long-term investors will be rewarded and reiterates Outperform rating.

- Merrill Lynch notes they expect Western Union to report pro forma EPS of $0.26 on revenues of $1,179mn. Their pro forma EPS matches the First Call consensus estimate. ML thinks investors continue to undervalue the global WU franchise and its long-term growth potential. Guidance should not be a concern as the company has already called for 10-12% organic revenue growth and 12-14% EPS growth in 2007.

While flagging growth in the Mexico corridor and in the domestic business has caused revenue and margin pressure recently, the firm thinks the market is overlooking WU's long-term growth potential as revenue growth outside of these areas remains robust. Last week, WU's competitor MoneyGram reported strong transaction and revenue growth in money transfer and they believe this strong performance can be attributed to MGI's global network. They hear more and more about pricing pressure, but believe this is largely captured in their estimates.

WU announced a few weeks ago that an Arizona court ruled in its favor and is prohibiting the Arizona Attorney General's Office from seizing money transfers "not sent from or intended for payment in the state." ML believes the worst is over and expect domestic and U.S.-to-Mexico transaction levels to build from here.

Sees weakness ahead of the qtr a buying oppy.

Notablecalls: Western Union is set to report its fourth quarter results after the market close on Weds, Jan 31st. Not actionable but good to know category.

Color on news: Intel (NASDAQ:INTC)

Several firms are commenting on Intel (NASDAQ:INTC) after the co announced a major breakthrough in transistor technology that has important ramifications for both the co itself and its competitors:

- Banc of America notes that in recent yrs, Intel's ability to increase the raw performance of its processors (via increasing the clock frequency) at a breakneck rate was significantly hindered by heat dissipation issues, as processors became increasingly 'hot' at higher frequencies. Consequently, Intel was forced to forgo clock speed (measured in GHz) as a way to increase performance; it instead had to drive performance via the use of multiple cores - with each core serving as a relatively independent processor - that collectively consumed less power.

The breakthrough announced last Friday allows Intel, via the use of new dielectric materials (the only one disclosed was Hafnium) and a metal gate in its 45nm manufacturing process, to demonstrate a 20% improvement in transistor performance, while simultaneously driving a 10x reduction in gate oxide leakage power (previously the dominant source of excess power issipation).The importance of this advancement, in firm's view, cannot be underestimated Intel will have the ability to introduce processors with much higher performance that consume significantly less power. This not only helps Intel move its PC processor roadmap along in an aggressive fashion, but also potentially allows the company to leverage its ultra low power processors in markets yet unexplored.

They note that while Intel has traditionally led AMD from a manufacturing technology perspective by 1-1.5 yrs (witness AMD's 65nm ramp- a full 5 qtrs behind Intel's), the announcement from Intel on Friday likely puts even more distance between AMD & Intel.

- First Albany believes Intel is using ASM International's (NASDAQ:ASMI) Atomic Layer Deposition (ALD) product for the high-K gate deposition step. While there are other ALD suppliers, they believe that ASMI was the only vendor working on the gate application, while most other ALD systems were targeted for DRAM capacitor applications or Barrier/Seed layers for inter-metal dielectric application. There are literally hundreds of metal and high-K material choices. Firm thinks it will be take a competitor years to find the right combination. In fact, Intel announced a working high-K/metal gate in late 2003 and, at the time, we thought it would be implemented in the 65nm process, but it took an additional 3 years to perfect the technology.

The only other company that looks to be close to Intel is IBM (IBM). IBM expects to use a high-k/metal gate at the 45nm node as well, but this will be introduced in the "2008 time frame."

Intel also announced that it has working microprocessors (Penryn) on its new 45nm process. In addition, the company has been able to boot several operating systems on its silicon. The company expects to ramp two 45nm in the second half of 2007 and a third in 2008.

Notablecalls: The news is probably not enough to move INTC stock but I suspect there will be some buy interest in ASMI following speculation by First Albany.

Paperstand (LCC, TSO, SUN, VLO, COP)

The WSJ reports that US Airways (LCC) is willing to increase its hostile takeover offer for Delta Air by $1bn under certain conditions as part of a last-ditch effort to win support from Delta creditors. The carrier said over the weekend that it would sweeten its $9.8bn cash-and-stock bid to about $10.8bn if the official committee of creditors approaches Delta with a demand that the Atlanta airline open itself to due diligence by US Airways. To get the additional $1bn, all in cash, the committee also would have to ask a bankruptcy judge to postpone a hearing next week on Delta's restructuring plan. The group also would have to agree to support the start of a formal antitrust review.

“Heard on the Street” out saying that with President Bush calling for significantly slowing the growth in gasoline consumption in the next decade, stocks of some refiners slipped temporarily last week, a sign that some investors are reassessing growth prospects for the refiners. That long-term concern may have overshadowed a near-term opportunity. There are good reasons to conclude refiners of crude are poised for a nice seasonal stock pop as the high-demand summer driving season approaches. Margins will "stabilize and start going back up in the spring," said John Parry, of John S. Herold. The energy-research co is bullish on refiners Tesoro (TSO) and Sunoco (SUN) and Valero (VLO). Although Herold doesn't rate those stocks, it has what Mr. Parry calls an "inferred buy" on them, b/c the stocks are trading below what Herold regards as their value based on their avg margins over the past 3 years. Herold has recommended investors buy ConocoPhillips (COP).

Sunday, January 28, 2007

Barron's Summary

Barron’s Roundtable members like NAV, KALU, TXI, MYY, FLML, SHPGY, CAR, SBH, TESOF, RIMM, AAPL, LRCX, HLYS, SLV, GLD, CVC, DA, GIS, BFA, IFF, WMI, GMT, SQAA, LCAPA. Another fund manager holds HPQ, ASH, TAP, PBG and VZ. Shorts include IPG, ADI, MRK, MEDI and UST.

If Altria (MO) spins off Kraft (KFT) and then divvies up its big tobacco businesses, its shares have the potential to return 20% over the next 18 months. "I'm very optimistic about the stock, particularly on a risk-reward basis," says David Adelman, tobacco analyst at Morgan Stanley.

Earnings gains and momentum trading have pushed the shares of BMC Software (BMC) to a recent 34. But based on the company's cash-flow trends, the stock should probably be in the high 20s. In addition, article suggests that BMC was a better takeover candidate at $17 a share than it is at $34.

The Euro Dogs Investment theory isn't foolproof, but it's produced nice results in most of the past 15 years. It's worth a look by anyone interested in adding large European stocks to a portfolio. FTE, E, ABN, BT, HBC, VOD, BCS, ING and RDSA.

According to the Barron’s, the Avis Budget (CAR) auto-rental unit has garnered scant attention. Therein lay an opportunity, a neglected turnaround story with freshly motivated mgmt. The co's brands have held stable mkt share, yet fleet-cost and pricing mismatches have knocked margins toward historical trough levels. But rental-car pricing is firming as newly independent Hertz (HTZ) and Avis Budget no longer serve corporate masters with other priorities. And fleet-car cost increases should moderate this year. Getting margins up to their 5-year avg would mean a doubling of earnings to more than $2 a share in ‘08, from 99c last year. That would make the Avis stock a bargain at today's 24, also the price at which mgmt's long-term equity incentives are struck.

“The Trader” section discusses Abitibi (ABY), saying that the Street is solidly bearish, with 50% of the analysts who follow it rating it a Sell and 35% a Neutral. The firm hasn't produced black ink since ‘03, and annual rev has been stuck at about C$5.3bn for a few years. There's also a decent-sized short position. One of the few Abitibi bulls around is John Schneider, of Touchstone Large Cap Value Fund. Schneider ests that in a few years, with a currency tailwind and stabilized newspaper and housing mkts, Abitibi could earn about US50c per share. Apply a 10 or 11x P/E multiple, and the stock could be worth roughly double today's price. The shares appear washed out, and probably have limited downside. That doesn't mean they're about to rise, but given how unloved the stock is, it likely wouldn't take much in the way of good news to push it up significantly.

“International Trader” section discusses Alcatel-Lucent (ALU), whose shares fell about 12% last week, following warning of slack sales and crumbling profitability. Still, the article suggests that investors should be reassured to some degree that the co plans to cut 200M euros in extra costs in ‘07. That's in addition to the 400M euros it planned to achieve in merger-related savings that it forecasts will be worth 1.4bn euros by ‘09. And Alcatel-Lucent's sales should pick up through ‘07 as US operators start spending again. The co's stronger positioning across fixed-line, wireless and Internet segments should start to have an impact. Last week's disappointing trading isn't an indication that won't happen. It's just a reminder of how difficult it will be.

“Technology Trader” section out saying that CommVault (CVLT) and Acme Packet (APKT) are both pricey, but could be worth a bet by growth investors. CommVault trades at 44x the expected earnings for its current fiscal year, and Acme trades at 55x current fiscal-year earnings. The big difference between these 2 co’s and many dot-com-era darlings: They're profitable, and they may reward investors handsomely over 3-5 years, says Christopher McHugh, of Turner Investment. "Acme's device routes Internet phone calls between different networks, and Cisco doesn't have a product for that, Juniper doesn't have a product for that," says McHugh. "They're addressing a real need the marketplace has." And CommVault has "some interesting new backup software that really seems to be taking mkt share," making the co a takeout tgt for EMC or IBM or another storage vendor, says Rich Parower, of J&W Seligman. The risks are high with these co’s, but as long as stock-fund managers are trimming their cash piles and looking to get in on the building of Internet 2.0, there should be ample demand for young stocks.

“Plugged In” column out with a piece discussing Motorola (MOT) vs. Nokia (NOK).
Read here.

Friday, January 26, 2007

Calls of Note Part 2

Jefferies notes that Investor confusion over Cogent's (NASDAQ:COGT) ability to handle various types of biometric information (company can handle fingerprint, palm and facial) coupled with spurious conclusions over pricing and competition trends have knocked COGT flat on its back. They believe 2007 could provide positive catalysts. Conversations with the government and the company suggest that Cogent is well positioned to win its fair share of upcoming awards, including the FBI next-generation identification system when it is awarded in the fourth quarter, in firm's view.

Firm's recent checks with DoJ suggest Cogent's technology is well suited for FBI's next-generation identification, in their view. Key requirements include speed and accuracy, multimodal biometric fusion (finger, palm, and facial), flexibility to adapt to changing requirements, ability to scale significantly, and interoperability with other government systems such as IDENT (a Cogent system). The current IAFIS system processes between 50,000 and 80,000 fingerprint submissions per day, a transaction volume that likely increase significantly as the civil portion of the system ramps-up. Furthermore, the government expects the size of the database to increase dramatically due to future retentions of civil submissions, a positive for Cogent. The government will at least consider foreign ownership, control, or influence, also a positive for Cogent. The FBI timeline is to have an RFP out in March, proposals submitted during the summer, and an award in September or October. Interestingly, firm believes the government plans only limited evaluations with some testing. Similar to US-VISIT, the award is likely made to a large systems integrator although the government reserves the right to specify an AFIS vendor.

Firm has Buy rating and $15 target for the stock.

Notablecalls: The stock has always been valued based on promise rather than performance. While all that Jefferies does is adding more promise, it just might do the trick with the stock beaten down and having sizeable short interest.

Calls of Note Part 1

Merrill Lynch lowers their '07 Genentech's (NYSE:DNA) Lucentis sales est. to reflect Dec. NDC data, which suggests reduced dosing frequency is negatively impacting sales. But, they'd see weakness as a BUYing opportunity despite lower Lucentis sales, concern about Tykerb approval in Feb. & issues related to Roche's low dose Avastin study in lung cancer. Avastin sales have re-accelerated & should continue to grow based on breast cancer approval in '08 and potentially positive data in adjuvant colorectal cancer by YE07.

NDC data for Lucentis sales in Dec. of $65 MM showed a sequential monthly decline from November sales of $75 MM. Firm believes the NDC sales decline reflected less frequent dosing of patients that began therapy several months ago. New patients are typically dosed once per month but after ~3 months, patients are dosed based on need, which they estimate at every three months. A large bolus of patients began therapy during
the drug's first 5 months on the market. But, these patients are beginning to be treated less frequently and new patient starts are not enough to offset the lost revenues.

Firm now expects 1Q07 sales to decline to $187 MM from $217 MM in 4Q06. They reduced their '07 Lucentis sales est. to $710 MM from $906 MM & EPS fell to $2.78 from $2.83.

Notablecalls: Interesting datapoint, Lucentis is too good for its own sake. It is working so well that only rare doses are needed, reducing the revenues. Remember, Lucentis was the source of upside the last qtr, but that may be limited from now on. DNA never gets hit big, but think the call will create some downside.

Color On Quarter: Synaptics (NASDAQ:SYNA)

Gross margins the main issue of discussion following Synaptics (NASDAQ:SYNA) 2Q report.

- Cowen notes that Q2 revenue was strong in both PC and music players, with 3c EPS upside from operations plus a 7c boost from lower taxes. Strong backlog for the March quarter prompts them to raise estimates. While GM guidance below 40% for the first time has psychological impact, firm believes a broader product set should drive faster growth and bottom-line benefits. Finally, firm sees further upside potential from the handset segment.

GM is expected to be about 39% in Q3, below the historical target range of 40-45%, due to the mix of consumer notebooks, and third party content and price competition in multimedia controls. However, with projected revenue up 47% Y/Y, EPS are 10% better than their prior model. Firm believes SYNA is strategically focused on driving incremental sales and operating profit, with actions such as moving more engineering to Asia, and the launch of OneTouch, configurable solutions, which allow customers to rapidly design their own interfaces.

- Bear Stearns notes SYNA reported 2Q07 upside and provided in line EPS outlook on higher revs. While declining gross margin is a concern, it attributed the decline to mix shift and noted that it is actively taking steps to improve margins. Firm is raising their ests and 2007 price target from $33 to $37. They would take advantage of any weakness in the stock given the increasing adoption of touch interface solution across increasing number of segments (consumer electronics, cellphones, etc.).

From a larger perspective, as a leading provider of user interface solutions, SYNA is well positioned to continue to benefit from the accelerating adoption of mobile devices (notebooks, cellphones, MP3 players, etc.). As seen in AAPL iPhone and LG Prada (uses SYNA), touch interface solutions like SYNA's are becoming critical as device sizes continue to shrink with increasing features and complexity of functionalities.

- First Albany says that consistent with what they believe were whisper expectations, the raised 3Q revenue guidance appears to reflect the continuation of Synaptics' dual source status in the iPod click-wheel business. However, the gross margin is expected to be only 39% in 3Q, 172 bps lower than their prior estimate.

According to the firm, the deterioration of the gross margin during 2Q reflects the ongoing mix shift toward low end notebooks and lower margin multimedia applications. While management hopes to reverse some of the gross margin degradation with cost improvement programs and the ramping of higher margin OneTouch offering, firm is prudently modeling in a sub-40% gross margin for the next few quarters.

Notablecalls: My best guess is that GM decline is rather a trend than a flip. Look at what the co is doing - clickwheels and touchpads, neither of them is what one would call something really unique or extraordinary. iPod clickwheels are dual-sourced so SYNA is not the only one with the knowhow, touchpads are really impossible to use and have plenty of makers. Only iPhone's touchscreen seems to be interesting, but hey, that's not SYNA's. With the stock trading at 25x 2007 EPS and GM set to decline, see no reason to own the stock.

Color On Quarter: Microsoft (NASDAQ:MSFT)

Plenty of firms commenting Microsoft (NASDAQ:MSFT) after the software giant reported its result last night.

- Merril Lynch says bears likely to focus on weaknesses in Xbox and Online. Xbox 360 met Q2 expectations of 4.4mn consoles, but lowered H2 guidance to 1.6mn consoles versus 2.6-4.6mn. In firm's view, this was likely done to balance retail supply with demand. Lower shipments could boost EPS in the short-term. Online was impacted by the transition to AdCentre, and will take time to work out.

Firm says Vista - core to FY07 investment thesis - is working. Client growth in Q2 of 9% y/y (adjusted for coupon program) was in-line with PC growth of 8-10%, indicating that Microsoft's SKU strategy is benefiting ASP's. Microsoft raised guidance for full-year Client revenue from 9-10% to 11-12% due to an expected full-year premium mix of 60%. In firm's view, a higher mix and good uptake of Vista could result in $800mn-$1bn revenue upside on an annual basis.

According to the firm, overhang for FY08 will be margin leverage. Management likely to talk about this on 2/15/07 meeting with investors in NY and on 3Q07 earnings call. Firm's view is that Microsoft is unlikely to make significant investments that would dilute margins. In a worst case scenario, MSFT could double or even triple Online opex of $400mn and keep margins flat because one-time launch expenses for Vista and Office will go away by the end of FY07. They think there could be upside of $0.10-0.15 to FY08 consensus EPS of $1.67, both from incremental Vista and Office 2007 revenue and lower opex.

- First Albany outlining positives and negatives:

Positives: 1) MSFT exceeded both revenue and EPS consensus estimates; 2) management indicated that December sales demonstrated encouraging signs of early adopter demand for Windows Vista, Office 2007, and Exchange Server 2007; 3) bookings grew 21% Y/Y, matching a multiyear high ; 4) Xbox 360 attach rates remain at record levels, while "Gears of War" sold >2.7M units within its first 8 weeks of release; 5) MSFT raised its premium mix expectations for 2H:07 to 60% from its previous estimate of 52%-54%; 6) SQL Server database grew >30% despite a tough comparison.

Negatives: 1) despite strong Entertainment (Xbox) results, MSFT reduced Entertainment guidance, probably reflecting a drive toward lower inventory levels; 2) despite a return to growth in Online Services (MSN), MSFT reduced guidance for Online Services, citing a slower expected growth rate in search queries and page views.

- JP Morgan notes that unearned came in at $11.9B in line with our target and ahead of cons. at $11.5B--and is a key positive data point on early Office traction as well as the burgeoning Client enterprise upgrade cycle. Along this line, Client unearned increased 35%+ YoY net undelivered elements and tech guarantee impact.

Q3 guidance of $13.7-14B/$0.45-0.46 is modestly below firm's $14B/ $0.45 est. and reflects higher deferrals, but they expected MSFT would be conservative. Q3 includes launch costs for Vista which will be largely one time in nature--and firm believes the co. is being cautious around early Vista and Office activity. They also believe that the EandD target of (15%)-(25%) YoY could prove to be too low.

MSFT has taken some of the upside off the table by raising guidance for Vista premium mix to 60%, raising Client rev. growth targets to 11-12% from 9-10% and reflecting some of the Office bookings strength by raising MBD targets to 10-11% growth from 8-9%. However, firm still believes 1) there is further upside in SandT on the SQL cycle, 2) MBD guidance reflects little ASP improvement which we should see, and 3) the Vista enterprise upgrade cycle could surprise.

Notablecalls: In otherwise strong results/guidance, Xbox guidance cut was the only negative surprise. However, I don't think this will be enough to spoil the party.

Color On Quarter: MEMC Electronic Materials (NYSE:WFR)

MEMC Electronic Materials (NYSE:WFR) getting mainly positive comments after the co reported another beat & raise qtr. Price targets and estimates are getting bumped at most firms.

- JP Morgan notes MEMC continued to show its pricing leverage. Even in a relatively flat semi wafer start environment, it modestly beat its GM guidance for C4Q06, and guided GMs up 200bps to 50.8% for C1Q07. Importantly, MEMC provided C07 revenue and PF EPS guidance of greater than $1.9bn/$3.00, with C07 EPS guidance significantly above pre-call consensus.

Inventories for MEMC continued their downward trend to 34 days, setting a new historical low. Management commented that inventory levels were near the absolute bottom and would probably not decline any further. Firm believes the continued decline in MEMCs inventory underlines the continued tightness of polysilicon which is unlikely to be resolved until 2008 at the earliest, in their view.

MEMC indicated that the demand for solar related polysilicon remains strong and unsatisfied. Additionally, firm believes C1Q07 is the low point this year for QoQ semi wafer start growth, and throughout the remainder of the year, as wafer start growth reaccelerates, MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between the two markets to exist throughout 2007.

- CIBC raising price tgt to $59 from $50 on strong results and an extremely bullish 2007 and long-term outlook. Firm notes that margins continued to rise and are further guided to rise, debunking the bear case.

Firm says MEMC continues to prove the wrong the bears, who claim that solar demand is not as strong as expectations and that corporate margins have peaked. The tight polysilicon situations (which is caused by PV demand), has led to a continuation of high silicon pricing, providing the revenue growth during the quarter. Management indicated that semiconductor silicon consumption was down slightly in 4Q, but was offset by slight pricing increases. This is in line with management's prior commentary and firm's checks across the foundry and semiconductor supply chain. As a result of the subdued semiconductor performance, revenue growth for MEMC was likely driven by increased spot polysilicon sales to solar customers, as more capacity has come online in preparation for the Suntech and Gintech solar wafer supply contracts that begin in 2007.

- Citigroup outlining positives and negatives:

Positives: Estimates going up yet again; solar allowing WFR to barely blink during semi downturn; guidance suggests solar margins 70%+ and likely to stay there for a while; labor savings still coming.

Negatives: When the music stops on poly shortages WFR's weakening 300mm position will become problematic; long-term model sets an extremely high bar and suggests mgmt is frustrated w/stock price.

Price tgt goes to $48 from $39, but "We've missed this train and we're not chasing it" as the note's headline says.

Notablecalls: Needless to say that I agree with the Citigroup here. It's been fun while it has lasted, but would not chase the stock at the the $46.5 levels of afterhours. I think they make a great point of mgmt being frustrated w/ stock price and don't think it's a good sign. Mgmt is probably understanding that the mkt is not expecting the music to play forever and therefore are laying out long-term model. Not sure if the mkt buys into that - after all, it's based on the same tidbits that have driven the stock so far. The stock has been acting too heavy of late for all the positive chatter. Any cracks in the buying interest may provide nice shorting oppty today.

Thursday, January 25, 2007

Calls of Note Part 2

- Stifel notes they believe large-cap Internet stocks are in the midst of a positive revaluation toward fair value. The sector has materially underperformed the broad market rally over the past several months. Investors need exposure to underperforming, high quality assets that quickly have become "need to own" names given the reversal in relative performance.

Firm believes (NASDAQ:AMZN) business is mispriced and they anticipate that the company is entering at least a period of 12-18 months of accelerating operating leverage. In the text of this note, they show the 23 different areas of investment that AMZN was involved in over the past year. These initiatives have accelerated AMZN's revenue growth to 26% on an organic basis, or the highest level of the large-cap Internets, excluding Google. During the past year, free cash flow has significantly delevered and has also been impacted by one-time events such as a patent payment, Toys R' Us litigation fees, and the removal of the excess tax benefit from stock options from its FCF calculation. This delevering begins to reverse in 2007 and accelerates into 2008. Overall, the firm anticipates 29% FCF growth in 2007 over 2005 (they exclude the 2006 trough year) and an additional 29% FCF growth in 2008.

Reits Buy and $44 tgt.

Notablecalls: One for investment types. It also gives a glimpse of the sentiment surrounding the large-cap Internet names.

Calls of Note Part 1

BofA comments on video game industry saying softer -than-expected demand for PS3 hardware could be an ominous sign given the historical success of third-party software sales on Sony's game consoles. Firm's recent checks indicate sluggish PS3 sales, despite much improved availability. They believe disappointing PS3 hardware sales are an incremental negative for all the game publishers. Firm reiterates their view that early 2007 could be a challenging time for publishing stocks and point to the soft demand for PS3's as evidence.

Based upon channel checks, 78% of the 50 retailers the firm spoke to reported PS3 hardware in-stock, while 70% stated inventory was lasting at least a week of sales. The PS3's price point and lack of compelling software titles were cited as the most common reason units were remaining on retail shelves. These findings run contrary to their (and consensus) thoughts about PS3 demand six months ago, when it was widely believed that the first few months of PS3 sales would easily be satisfied from pent-up demand. In contrast, Nintendo's Wii hardware is experiencing strong demand, but lower- than-expected supply.

Bottom line, the key risk is that FY08 software sales are at risk unless PS3 demand picks up (logically the result of a pricecut) or the publishers make meaningful inroads on the Wii platform. Firm estimates that PS3 sales will account for approximately 21% of their publisher's total FY08 sales. On the margin, they view Electronic Arts (NASDAQ:ERTS) as the most exposed to soft PS3 sales.

Notablecalls: Think the PS3 concerns are somewhat overblown. After all, it's 4 weeks after Christmas. You really think there won't be pricecuts? Nevertheless, the wording of the call is strong enough to generate some weakness in ERTS.

Color on quarter: Novellus (NASDAQ:NVLS)

Couple of interesting comments on Novellus Systems (NASDAQ:NVLS) following earnings:

- RBC Capital is maintaining their neutral stance on NVLS following its earnings call. The stock was trading up in after hours in spite of disappointing 1Q07 revenue and EPS guidance on short covering, in our view. Firm expects the stock to drift lower over next few days. Notes they will be more constructive on the NVLS and the semi-cap sector when they start to see meaningful orders from foundries.

EPS was higher by 8 cents primarily due to higher non-operating income and lower taxes. Higher gross margin contributed a penny to EPS upside. Orders and revenues were in-line; shipments of $390M were significantly lower than the guidance of $410- 420M. Order guidance of down 5% to 10% was slightly better than firm's expectations. As they expected, the Company guided for sequential increase in shipment. Firm is still disappointed as the increase is primarily coming as result of push-outs from 4Q06.

Management commented that second half would be better than first half, in sharp contrast to Lam Research's commentary. Although it is possible for NVLS to a have better 2nd half due to lower exposure to memory, the firm is not ready to step in and buy the stock.

- Cowen notes NVLS's Q4 was at the high-end of guidance on most metrics excepts for shipments which were 5%light given some industry push-outs/reschedulings. Bookings (-6%) were in line despite some order push-outs in logic. While commentary acknowledged a modest ST slowing, NVLS suggests a pick-upin H2 and suggested that push-outs had more to do with in sourcing/outsourcing decisions than the industrybeginning to roll-over. Given an increasing number of IDMs (TXN...) shifting more to foundries and shifting partner strategies (Freescale and others) this makes sense. NVLS suggests a foundry pick-up in H2. Still optimistic on the overall memory cycle - both DRAM and flash though there's a lot riding on Vista and new flash applications. Reduced shipments and a one Q impact from NVLS global biz structure (reduces taxes) drive Q1 below expectations. Still, given the recent sell-off, NVLS will probably be up a bit. Though NVLS has done a nice job tightening operations, increasing leverage etc., the firm will remain on the sidelines given industry cross currents and a stock lifted by merger talk which seems unlikely.

Notablecalls: Think NVLS may squeeze a bit higher before fading. No more than $32 range, though.

Color on quarter: eBay (NASDAQ:EBAY)

Several firms are commenting on eBay (NASDAQ:EBAY) after the co issued surprisingly strong results and guidance last night:

- Piper Jaffray says that while eBay produced a strong quarter with upside to their estimates, the majority of the upside came from foreign exchange.

Listing growth has slowed considerably (12% y/ y); while monetization improved to $1.75 (ex forex) in Q4 from $1.65 in Q3, it failed to reach firm's target of $1.80. Unclear how much of the monetization improvement was Q4 seasonality.

Revenue per active users improved to $13.05 (ex forex) from $12.01 which is a positive sign and slightly above the bar the firm set in their last note as an indication of a reversal. Investors should continue to watch this to see how much seasonality and one-time high demand products affected this metric in Q4.

Usage growth continues to decelerate as active users increased only 14% y/ y in Q4, down from 17% in Q3, and at 82M was 2M below the 84M necessary to stabilize this metric. GMV growth (ex forex) flattened to 16% y/y growth, and likely benefited from higher ASPs in the quarter.

Despite the stock's strong positive reaction in the after-hours market, they believe eBay failed to produce a quarter that would indicate sustainable acceleration of growth. Firm believes an assumption of a declining growth rate for core is still the more realistic scenario. However, despite deteriorating fundamentals, the company is likely to continue to produce acceptable earnings results, helped by non-core factors, in the near term and as such, the stock is likely near its floor. They are therefore increasing their rating to Market Perform to reflect this reality and increasing price target to $30 from $25. They do believe that the near term cash generation of eBay will eventually catch up with its deteriorating fundamentals and slow down, but until then, investors are likely to give EBAY a more generous multiple.

- Deutsche Bank reiterates HOLD investment rating on shares of eBay despite the solid 4Q results that came in soundly ahead of expectations. While they are encouraged by the solid performance (and modest improvement in the underlying metrics), it remains a little difficult to fully extrapolate exactly where eBay's upside came from, especially with listings/transactions up 10%/11% Y/Y and GMV up 16% (FX adjusted).

Despite the respectable performance in 4Q (that should be well received by investors today), theythink that eBay faces longer term structural challenges in its business (that may be on hold in the near term). Specifically, the company still has to aggressively invest in demand (via marketing) to generate transaction volumes and GMV, a concept that may be fine tuned but difficult to defend against as off-line retailers (i.e. BestBuy, Wal-Mart, Circuit City, etc.) spend online to take advantage of lower-priced online media buys. As a result, seller feedback still remains negative from the notion that sellers are seeking for growth in sales and profits (for which growth
is proving increasingly elusive these days). While the stock will be up on short covering as a result of the 4Q strength, they think investors should wait on the sidelines to see if the 4Q uptick was a seasonal event or a sustainable trend.

Deutsche is raising their 2007 EPS estimate from $1.19 to $1.27, with revs now at $7.201bn from $7.007bn. $100mn in revs came from the StubHub acquisition. Tgt goes to $32 from $29.

- RBC Capital notes listings growth decelerated, but EBAY rebalanced the US marketplace, increased conversions, and stabilized ASPs. PayPal shrugged off the competitive threat from Google Checkout. Currency and acquisitions also added to growth. Finally, eBay will benefit from the repurchase of another $1b of stock, and the authorization of an incremental $2bn over the next 2 years.

Management raised guidance due to StubHub, which accounted for an incremental $105mm-$120mm, carryover of strong trends in 4Q06 accounting for about $60mm, offset by the exit from China of about $10mm-$15mm.

Using full 2008 estimates on EBAY (vs. blended 2007/2008),the firm now arrives at a price target of $38. They believe shares will have some follow through beyond the one-day earnings related move today, giving the company the benefit of the doubt in the near term. RBC is unsure whether this is a situation driven by easy compares and currency upside, or whether to believe the trends will remain strong throughout 2007.

Maintains Sector Perform rating.

Notablecalls: Looks like short covering will be the name of the game today. Yet, decelerating listings and usage growth will continue to weigh on the stock after the shorts are out of the way. The stock traded as high as $34 in after hrs. It may have some more upside in it, but I suspect it won't be more than say half a point.

Paperstand (RIMM, LCC, FCX)

According to the WSJ's "Heard on the Street" column, since the day Apple (AAPL) showed off its new iPhone, shares of RIM (RIMM) have been taking a beating. The logic: iPhone, capable of sending and receiving email, could eat into the mkt for RIM's BlackBerry. But it is too early to count out RIM. Indeed, many investors say that RIM may still have some growing to do. Its corporate wireless email device and service are poised to expand in mkts outside N-America, and has become practically indispensable at many large corporations. And the co has opened a 2nd-front: the consumer mkt. Its first foray into that territory, a stylish wireless email phone with a built-in camera named the Pearl, is selling well and a new line-up of devices geared toward both business users and consumers is coming soon. Expected to be priced far below the iPhone's $499 starting price, the new and already available RIM devices serve a different mkt segment, investors say. The iPhone is expected to appeal to high-end consumers seeking to upgrade their iPods. Others may be put off by some of the iPhone features such as its touch-screen keyboard, limited battery life and camera, a feature often banned by corporations. What's more is that RIM has a cozy relationship with some 225 network operators globally, who make large profits selling BlackBerry service. By contrast, Apple has decided to work with a single operator in the US, AT&T's (T) wireless unit. Investors believe RIM's easy-to-use technology and solid brand awareness make it uniquely positioned to increase its mkt share on multiple fronts. "I am willing to give them the benefit of the doubt that they will continue to come up with competitive offerings on the consumer side and I think they have more room to grow even on the enterprise side," says Martin Hubbes, of AGF Funds.

The WSJ reports that a group of Delta Air Lines bondholders Wed urged negotiations to begin on US Airways' (LCC) $9.8bn hostile takeover of the airline. The ad hoc committee of unsecured creditors, an informal group formed in Nov largely in support of the merger, said Delta has inflated the risks in order to kill the deal and exit bankruptcy-court protection as an independent co later this year. The bondholders believe opening discussions with the carrier could yield a more lucrative offer and thus fatten the payout to all Delta creditors. US Airways has set a Feb. 1 deadline for its offer to expire unless it wins approval from the official Delta creditors committee to examine Delta's finances in order to fine-tune the offer. The official committee, comprised of the 9 largest holders of Delta claims, has the authority ultimately to approve the merger or the standalone reorganization plan submitted by Delta. "It is our view that the concerns voiced by Delta mgmt about antitrust, labor and consumer issues related to an US Airways deal are exaggerated, and we believe a transaction is possible," said a spokeswoman for the ad hoc group. "We urged the Official Creditors' Committee today to engage in discussions with US Airways."

Barron's Online "Inside Scoop" section reprots that a director of Freeport-McMoRan (FCX) has loaded up his biggy bank with $26.7M in the shares of the co, ahead of approval for the co to buy Phelps Dodge. Robert Day purchased 377K Freeport shares on the open mkt on Jan. 22 , and another 123K shares on Jan. 23. Day has been on Freeport's board of directors since '95. This week's shopping spree is Day's first reported purchase of Freeport stock on the open mkt in the 12 years he has sat on the board.

Wednesday, January 24, 2007

Calls of Note Part 1

- Thomas Weisel comments on Wynn Resorts (NYSE:WYNN) saying Macau gaming win rose a healthy 44% in 4Q06, which bodes well for Wynn Macau and could be a source of upside for WYNN. Based on market win and recent market share figures, the property could be tracking ahead of firm's top-line estimates by 5% or more.

Stock call: A strong quarter with the potential for upward revisions could prove to be a short-term catalyst for the stock, but they continue to harbor concern over valuation and would remain on the sidelines at recent prices.

Based on estimates, they get to an $80-85 CFV (sum of the parts), and the stock is well above that. We argue that investors are paying a fair price for existing resorts, announced projects and giving credit for at least one other project. Firm sees upside potential as limited and would remain on the sidelines until they get clarity on further projects in Macau and plans for the Cotai Strip in particular.

Notablecalls: Not actionable but good to know category.

Color on results: Citrix Systems (NASDAQ:CTXS)

Mostly positive comments on Citrix Systems (NASDAQ:CTXS) following Q4 results:

- JP Morgan notes there is some hair here--but this is a much better outcome than most expected and CTXS should trade well.

At first blush, the results and guidance look strong across the board with the exception of operating margins, where CTXS has been historically inconsistent. Q4 earnings of $0.39 exceeded consensus of $0.38 with about $0.01 from repurchase activity and operating margins of 26.7% were below 27.6% estimate. Deferred revenue of $356M was ahead of $349M estimate while CFO of $97M exceeded firm's $82M target.

The stronger license is likely a result of the direct business-where firm's checks were stronger and should provide comfort that there is some stabilization in the core App. Virtualization business, which should enable mgmt. to maintain growth targets for the App Virtualization-key for CTXS to
emerge from its transition post Q107. They also believe ANG was solid vs. $28M target.

Guidance encapsulates Q1-which most viewed as a key risk heading into the quarter--and should enable consensus estimates to modestly move higher, and leave room for further upwards earnings revisions through the year.

Shares traded at 20.7x JPM's CY07 $1.55 in the after market, still below group average of 22-24x.

- Merrill Lynch notes Citrix delivered modest 4Q06 EPS upside, while across-the-board YoY license strength should temper lingering pessimism over Presentation Server. The robust product pipeline supports firm's conviction in Citrix' portfolio strategy, while added distribution breadth could underpin potential for appreciation in the shares.

Citrix' 4Q results suggest at least part of the weakness in Presentation Server in 3Q may have been execution related - which is easier to remedy than a secular decline. ML thinks management understands the need to maintain focus while expanding the product portfolio both organically and through acquisitions. Looking forward they expect a steady calendar of new product launches and new introductions to the channel beginning with the Partner Summit later this month. They continue to like the story and the stock and would be aggressive buyers at current levels.

Reits Buy and $39 tgt.

- Goldman Sachs notes Citrix Systems reported strong 4Q results, with core Application Virtualization business growing 11% in the quarter with license revenue growth of 2% year-over-year. The bear case had largely revolved around potential yoy declines, and thus the report should help bolster the belief that new use cases such as outsourcing, disaster recovery, and potentially even Vista upgrades for enterprises could drive low-mid-single-digit growth here.

Results should prove to be a positive for the stock, which has already rebounded significantly from its December lows when fears of Application Virtualization weakness were strongest. That said, they see plenty of new product releases and upgrades to carry performance higher from here. Firm's EPS estimates for FY07 and FY08 are $1.55 and $1.77 (ex-ESOs), compared to $1.55 and $1.76 previously.

- Stifel think there are not a lot of negatives but they believe that some could be disappointed in the lack of upside to EPS estimates for 2007 in the face of a higher 2007 revenue outlook along with the overall lack of margin expansion flavor in the story. Voluntary stock option investigation a minor negative but their sense is that the market cares less and less about stock option issues with each passing day.

Maintains Hold rating. The firm notes they clearly missed a short-term buying opportunity with early January concern about how 4Q would play out. At this point, they don't see any major near-term catalysts that would yield a meaningful acceleration in Citrix's growth and yield upside to estimates though a number of initiatives could prove interesting in terms of the 2008 outlook. They also don't believe that the shares will likely experience any significant multiple expansion in the near term.

Notablecalls: Waterpistol to the head, I think we will see an initial surge of short covering after the open, followed by a sizable pullback. But that's a low conviction call. The results were surprisingly good.

Color on results: Yahoo! (NASDAQ:YHOO)

Several firms are commenting on Yahoo (NASDAQ:YHOO) after the co released its Q4 results and 2007 guidance.

- UBS thinks management hit all the right notes in their prepared remarks and during Q&A. The fourth quarter itself was solid, with branded the obvious highlight. Of course, the announcement that the new Panama ranking switch would be turned on February 5 was something that the firm, along with most investors, had been waiting on for some time.

Guidance is the one area where some investors may be a bit concerned as the revenue midpoint implies 14% y/y growth (the low-end of guidance implies just 8.6% y/y), however, the firm believes this guidance will prove to be relatively conservative. They assume that branded can continue to perform at least in line with the overall online ad market at about 25% in '07, and if one takes the company at face value in that Panama can provide double digit increases in search by the back half of the year, then it amounts to top-line growth of at least 16%-18% year over year.

The bottom line is that they think investors want to believe in Panama and that this management team can execute. We think that sentiment will improve on the heels of the Panama launch. While there are sure to be bumps in the road as the new technology is released, the firm continues to believe that investors will be rewarded as Yahoo moves forward in 2007 and Panama begins to show tangible results. Finally, they point out that Panama may continue to surprise investors as its scale and scope become better understood as a platform designed for much more than just text-based ads.

The read through for Google is difficult given the differences in Yahoo and Google's growth trajectories and monetization efforts. Having said that, UBS thinks Yahoo's q/q search growth was about 3-4%. That implies to us that it may be difficult for Google to see the 20% q/q growth they think it needs to move the stock up significantly. They think that Google had about 10-12% q/q volume gains in the quarter. So while Yahoo likely had zero monetization gains, they are not sure that Google's monetization improvements were significant enough to push it over 20% q/q. The profile internationally could be different, and may make firm's projections look conservative. However, given the uncertainty in the quarter,they recommend investors refrain from the short-term trade on Google's quarterly results. Rates Google Neutral.

- Stifel notes Yahoo! experienced a quarter that was at the high-end of its lowered guidance
and issued guidance below published expectations. In firm's view, investors are placing a bet that Panama will improve the growth of the business, not for just twelve months, but on a long-term basis.

On the positive side, Panama is here and management noted that the new ranking module will be active in the U.S. on February 5. This means relevancy will be a component of paid search results, like Google. The company is also planning the beginning the rollout in international markets in 2Q. Management further noted that the new search platform will begin to show revenue impact in 2Q and accelerate throughout 2007 and beyond. The company has issued back-end loaded guidance that incorporates a Panama lift beginning in 2Q06 and improving throughout the remainder of 2007. For Yahoo!, the firm projects 2007 revenue growth with Panama of 16% to $5.3 billion, a growth rate lower than both Amazon (21%) and eBay (19%).

Firm's view is that we are at a point of maturity on the Internet that opportunities are no longer greenfield in nature. In other words, at this juncture, when one company wins another loses. They strongly believe that Google and Yahoo! are direct competitors and that the growth trends favor Google.

They believe the risk to Panama is to the downside as expectations for its launch and a 2H benefit now seemed priced in at 30x 2008 FCF. Also, within the search business, they believe Google's better monetization has created an environment in which Google can always outbid competitors for affiliate deals unless competitors choose to give away all the economics of a deal. Expects Yahoo! to continue to experience affiliate departures throughout 2007 due to the network effect apparent in Google's affiliate business.

- Deutsche Bank is maintaining their HOLD investment rating on shares of Yahoo!, and
believe that the slowing core growth at Yahoo! (particularly pronounced in search) and optionality from the Panama platform have already been priced into the shares. While they contend that not much has changed from yesterday to today, the shares have been bid up on a February 5th Panama launch (all the while the 2007 guidance came in lower than Street expectations). In firm's view, the stock is likely to give back the modest gains overnight as investors dig deeper into the financial and valuation.

While the stock has moved higher on the monetization platform being on time, the quantification of the impact remains a debate. Guidance was lower than expected with a wide range of 8%-20% top line growth. As for the stock, they would be buyers of the stock at $25 and sellers at $30, given the slow 1H growth and uptick in 2H (already in the stock).

Notablecalls: While I love the rationale behind UBS' comments, Deutsche's call is likely to be right in the s-t. YHOO's a short above the $28 level.

Paperstand (MEAD, LEG, TIN)

According to the WSJ’s „Inside Track” section, stock purchases by 2 major shareholders of Meade Instruments (MEAD) loom even larger now that the funds have representatives on its board. Hummingbird Mgmt, Meade's largest shareholder, and Monarch Activist Partners reported increasing their stakes in the co over the past 2 weeks. The stock purchases are the first by the shareholders since June, when Meade agreed to let Hummingbird's Paul Sonkin and Monarch's James Chadwick join the co's board. After the most recent purchase, Hummingbird owns about 15.6% of Meade's stock outstanding, while Monarch has amassed a 3.7% stake. "Certainly it's positive that not only they're now on the board and they have more say in the direction of the co, but they're continuing to increase their respective stakes in the co," said Ben Silverman, of

Barron’s Online highlights Leggett & Platt (LEG), whose shares have languished along with the home and automotive sectors. But a recently completed restructuring program and new acquisitions may give the co and its stock new legs to stand on in ‘07. Despite setbacks in several of its core mkts, Leggett's stock, which trades at 14x forward earnings, has the potential to climb at least 15% over the next 12 mo, as the benefits of a comprehensive restructuring program, which was completed last qrtr, drive into full gear. "In a mkt where there are a lot of uncertainties related to housing, this is a stock we think will hold up better b/c of its track record, mgmt team and dividend yield," says Trip Rodgers, of Carlson Capital.

“Inside Scoop” section reports that late Monday, Carl Icahn and his investment partners reported they have spent about $301.2M to purchase 7.2M shares (or a 6.73% stake) of Temple-Inland (TIN) on the open mkt starting in the 4Q05. Icahn's group also has exposure to another 3.38M shares, or 3.16% of Temple-Inland's nearly 107M outstanding shares, through a number of derivative agreements (total return swaps) with counterparties. Jonathan Moreland, of, says that with Temple-Inland, it seems that Icahn "wants the big money like the '80s -- buy it and break it up." Although Icahn "is rarely bad to bet with," Moreland says that investors should have a stomach for volatility because sometimes his suggestions don't work out.

Tuesday, January 23, 2007

Calls of Note Part 4

- CIBC is reiterating their Sector Outperformer rating on Trident Micro (NASDAQ:TRID), while raising CY07 ests. & introducing CY08 forecast. Following a seasonal CY1Q, they expect TRID's image processing lead, peerless mid/high-range decode economics, & superior growth prospects, will be quite evident, to value & growth investors alike.

TRID has been under undue and incessant pressure for the past 3Qs, due to confusion over competition (BRCM, Mediatek, ZRAN, & ATI--non of which really compete with TRID), TRID's reticence (due to options-related 10K/Q delinquencies), and naturally declining, yet still sublime, gross margins.

In the report, the form elucidates why they believe investors & the cacophony of boorish bears are totally wrong about TRID, and why it will be a steal beyond C1Q:

- Firm believes that thus far, not a single Broadcom win has come at TRID's expense

- TV markets are bifurcating and TRID has laid claim to the mid to high end as others such as Taiwan Inc. battle at the low end.

- In spite of inevitable erosion, Trident s Gross and Operating Margins are still well-above the average (within the Digital Media Semiconductor peer group) and, as such, TRID should trade at a premium valuation rather than at a 30%+ discount. While gross margins are definitely coming down, and will likely see a high-4- handle in CY08, the firm believes that Trident should be an exception to the rule.

- TRID is on track to put its options review and management succession issues behind it in short order.

Along these lines, the firm increased their CY07 est. to $1.32 on $325M from $1.30/$320M, and established CY08 ests. of $1.80 on $450M. At ~13 new CY07E EPS of $1.32, TRID trades ~33% below peers' 20x. On the contrary, they believe TRID deserves a premium valuation, given its expanding domination of Tier-1 image processing (adding Philips in C2Q), and its growing- likelihood of similar success in HD decode during CY08.

Reits Sector Outperformer and $25 tgt.

Notablecalls: Would not be surprised to see some buy interest following the call. But also but sure to check out comments from TXN.