Friday, March 30, 2007

Have a nice weekend!

Calls of Note Part 3

Prudential notes that trading in Avici Systems (NASDAQ:AVCI) shares has spiked this week, accompanied by a swift move in prices over the past 3 days. This week, nearly 40% of the outstanding shares have traded (nearly 5.5M shares), vs. the 20-day average daily volume of about 400K going into the week, though spikes as high as 60%-70% of total shares in a single day occurred twice in the past year at earnings releases. Firm does not believe this recent trading is driven by positive long-term fundamental developments for Avici.

AVCI is almost entirely dependent on a single customer, AT&T, which uses AVCI products as its primary core routing platform. Given AVCI's limited resources to support development, both monetary and in headcount, firm expects AVCI to be displaced as sole core provider to AT&T, something AVCI has also acknowledged in filings.

AVCI started seeking potential buyers more aggressively in 2/06, coinciding with a near 50% cut in headcount, but by the end of '06, none had emerged. Some potential buyers, including Huawei, Alacatel-Lucent, and Nortel, have exited previous reseller/OEM agreements with AVCI, hardly the action of interested buyers. At this point, firm believes it is unlikely AVCI will find a buyer in the telco vendor community. Nor do they believe AVCI is seeing traction yet in its SOAPSTONE project, which is still in early development.

Reiterates Underweight and $6 tgt.

Notablecalls: Expect the stock give back at least some of this week's gains.

Calls of Note Part 2

ThinkEquity believes that WebSideStory (NASDAQ:WSSI) is underappreciated for secular trends and strengthening positioning, which has depressed valuation multiples. Firm's recent checks suggest activity levels and sales focus have improved nicely q/q, which suggests that risk/reward levels are current levels. They're encouraged that CEO Jim McIntyre's leadership has focused and re-energized the company, and expect that increased confidence both in his leadership and in the broadening customer analytics opportunity drives multiple expansion.

Firm would not be surprised if management had relatively strong visibility into Q1 targets, given that the Q4 results were announced late in February (vs. instead of in late January) and given that firm's checks suggest that Q1 was off to a good start. They're aware of a large Visual Sciences deal with a new customer and also some other opportunities which were closed early in Q1, which drives their comfort levels with their targets (which are slightly ahead of street estimates).

Online ad spending continues to be healthy (especially with increased interest in online video advertising or mobile ads and ramping credibility of Yahoo search), although any mild slow down in online ad spending could potentially be positive news for web analytics vendors: In fact, firm wouldn't be surprised to see organizations shift some focus to improving online measurement and optimization in order to drive increased funding for online advertising programs in the intermediate term. Given that web analytics is a key enabler of online site measurement and optimization, they expect that overall interest in web analytics and related customer targeting (search, bid management) continues to grow nicely.

WebSideStory going after the broader customer analytics opportunity via the Visual Sciences platform, which opens the door to a larger IT spending pool: Firm believes that WebSideStory is differentiated vis- -vis other web analytics vendors on its ability to solve broader, more complex customer analytics opportunities. This broader customer analytics opportunity requires a next generation platform to span both online and offline worlds and cut across channels (email, IVR, kiosk, catalog, POS, reservation) in real time, and enable more flexible, deep dive, and real-time analysis of customer trends and opportunities. Firm believe that the budget for a broader customer analytics solution could come out of the IT budget instead of the online marketing budget, and thus opens the door to much larger pool of spending (could be 10x more spending on Business Intelligence to support marketing than on Web Analytics to support online marketing). They acknowledge the increased challenges in navigating the more technical conversations with IT and the business intelligence teams in sales cycles, and are comfortable that the reps are appropriately and quickly ramping up.

Firm has Buy rating and $22 tgt for the stock.

Notablecalls: There are some comments about the current quarter too, but overall it's rather for you investors out there.

Calls of Note Part 1

SunTrust says they remain bullish on Bankrate (NASDAQ:RATE) and contend that the shares? recent swoon reflects an over-reaction to perceived macro risk factors. It is their opinion that the company's proprietary content, overwhelmingly low-cost organic traffic and superior monetization will fuel sustainable long-term above-average organic revenue, EPS and free cash flow growth through the economic cycle.

Some RATE detractors argue that ongoing turmoil in the sub-prime mortgage market presages overall market deterioration, which will ultimately cause many of the company's advertisers to fail or will substantially erode the company's pricing power. Firm contends that these concerns are materially misplaced, however, in light of the company's increasingly diversified advertiser base and its superior value proposition.

While they acknowledge that a sharp mortgage market contraction or a protracted secondary market liquidity crisis could cause a dramatic mortgage volume decline - with a clearly deleterious financial impact on Bankrate - they believe these are relatively remote possibilities. Firm encourages investors to note that the overall mortgage market remains healthy, despite the sub-prime debacle, as measured by 1Q07?s robust MBA index performance. This is a reliable indicator of Bankrate's traffic, in their opinion, and reflects an apparent dichotomy between prime and sub-prime demand.

They are also constructive regarding Bankrate's pricing power. Some bears argue that a mortgage market contraction would adversely affect the company's pricing leverage. Again, while a deep, protracted downturn could cause the failure of sufficient mortgage advertisers to dent aggregate demand, firm contends that Bankrate's value proposition to advertisers, coupled with an increasingly diversified base, will allow the company to continue raising prices and monetizing traffic. Firm reminds investors that higher revenue per page view reflects both explicit pricing increases and improving yield. They anticipate ongoing yield optimization.

Notablecalls: RATE tried to bounce yesterday on positive mention from Jefferies, but tough tape dragged it back down. Expect to see another attempt today with better results.

Color on Quarter: Red Hat (NYSE:RHT)

Several comments on Red Hat (NYSE:RHT) after co's F4Q07 report and FY08 guidance.

- JP Morgan notes RHT reported modestly softer than expected Q407 revenue and Q108 revenue guidance, while the company's FY08 guidance encapsulates consensus-and EPS guidance of $0.67-0.72 compares well to consensus of $0.68. They are relieved to not see a downward revision to FY08 margins given recent commentary about JBoss investments. FY08 cash flow guidance of 15-20% growth will likely bring upward revisions to cashflow and provides comfort for billings growth in the 17-23% range for FY08 which compares firm's estimate of 21%. While Q4 could have been stronger, the FY08 outlook is encouraging and should provide support for the stock.

Firm says Cashflow and billings look solid going forward. They have raised their FY08 adjusted operating cash flow to $255M from $246M (guidance was $250-260M) which puts their FY08 billings target at 21%-a modest increase from 20.5% growth in billings heading into the print. Furthermore, the mix of long term billings decreased to 25% of billings from 29% in Q3, and should provide some relief to concerns on elongating cycles though, the number was up YoY from 21%. The increase in the FY08 billings target is the takeaway here and provides comfort over the quarter-to-quarter volatility in subscription and billings growth.

- Bank of America says execution continues and fundamentals remain solid. Although RHT didn't deliver another blowout, the biz continues to trend well, as better than expected subscription rev ($96 mm), solid billings/non-GAAP cash flow ($138 mm, $56 mm), and slightly more bullish '08 guidance overshadowed a $2.3 million training/services revenue shortfall.

What are we doing with the stock? While a tough tech tape could limit some of the upside in the near term, firm remains buyers here, as they were encouraged by another quarter of solid execution and believe Red Hat's risk/rewardprofile is attractive at current levels. In addition, Red Hat remains one of the few secular growth stories in the enterprise software space, which could bode well for the shares should market sentiment rebound in 2H07.

- Baird notes that the risks and noise swirling around this story have begun to fade; 1) Oracle and Microsoft/SUSE have not disrupted demand; 2) projections by some industry analysts that Linux server shipments had slowed proved untrue; 3) JBoss has not experienced personnel defections in the wake of Marc Fluery's departure; and 4) the advent virtualization is not likely to cannibalize RHEL license sales.

Firm's concern had been that the introduction of GPLv3 would create confusion and consternation in the market. The most recent draft introduced just two days ago was most encouraging. The language around the patent provision appeared much less threatening.

The JBoss product offering remains in the early stages of development, and holds considerable long-term prospects. Firm expects Red Hat to remain a disruptive change agent within the software industry, to the continued benefit of its shareholders.

- Goldman Sachs says Red Hat's 4Q FY2007 was a mixed bag, with guidance ultimately putting a positive spin on results that were more in-line with estimates and likely a touch below the more bullish expectations. That said, the most important metrics - namely cashflow and billings both beat their estimates coming in at $46m and $138m (up 35%) respectively compared to their $41m and $133m expectations. Guidance (particularly on cash flow) should result in rising Street estimates. Firm's revised FY'08, FY'09 EPS estimates are $0.70 and $0.83, compared to $0.66 and $0.78. They are initiating FY'10 EPS estimates of $0.94. (Including ESOs expenses their estimates are $0.55, $0.69 and $0.82).

Notablecalls: Strong billings and cash flow guidance sent the stock up ~5% in the afterhours. While I'm positive on the stock l-t as the mgmt continues to execute, it's tough to see any more upside today in the current mkt.

Color on Announcement: Dell (NASDAQ:DELL)

Couple of firms comment Dell (NASDAQ:DELL) after co delayd its SEC filings due to ongoing investigation.

- JP Morgan notes last night Dell announced that its 10-K filing would be delayed owing to its ongoing accounting investigation. While this was not entirely unexpected, the company went on to note that the audit committee's investigation had uncovered evidence of "misconduct," a number of accounting errors, and deficiencies in the company's financial control environment.

Firm believes the accounting investigation had been largely overlooked by investors, who had become increasingly focused on what Dell's restructuring plans would be. Now that the company has revealed that misconduct has occurred, firm believes the risks are more pronounced for whatever the investigation uncovers. The company has not definitively noted that a restatement will be necessary, but the company has noted the investigation is focused on revenue recognition and accruals.

- Prudential says that while the delay and language contained within the press release will be a disappointment to some investors, they think there is little risk of a delisting and/or criminal charges being brought against Dell's current executives.

They continue to recommend owning shares of Dell on our belief that there is operating leverage in the model due to 1) reduced component and operational costs, 2) a balanced pricing strategy, 3) server and storage product cycles, and 4) services expansion.

- Cowen says the main concern they have with yesterday's announcement is not the timing of when Dell will file their 10K, but what will be in the filing. They would rank the order of our concerns to be first "evidence of misconduct" then "deficiencies in the financial control", and finally just "accounting errors". For the Dell near term bulls, these comments raise the concern that historical margins that the company has enjoyed, might not be accurate. If so, the premise that the company can get close to prior margin structure might not be as important. Dell has not stated if these items will require restatement. Firm believes the company is providing information as it becomes available, but has not yet concluded its efforts.

- Merrill Lynch says their initial read is that a worst case restatement scenario appears unlikely to be consistent with the language in Dell's accounting disclosure and the outcome may be more benign than words like "misconduct" and "deficiencies" first suggest. They find it unlikely that a significant restatement would be lurking undisclosed at a point when Dell's Audit chair simultaneously asserts: (1) "as we move toward the conclusion of our investigation"; and (2) "the Audit Committee is working . . . to determine whether the accounting errors necessitate any restatements of prior period financial statements, and to assess whether the control deficiencies constitute a material weakness in Dell's internal control over financial reporting."

If Dell is near the conclusion, wouldn't it identify now if it believed a material restatement was likely? That it's still determining if "any" restatement is required suggests it may be unlikely to find a significant and obvious case at this late stage.

In firm's opinion, the key question is whether Dell's accounting errors constitute (a) earnings smoothing from quarter to quarter yet essentially accurate reporting over longer periods; or (b) outright misrepresentation of earnings power over multiple annual periods such that investors' view of historical margins is slashed.

Notablecalls: It would be easy to call not filing 10K a non-event as Prudential does, but the possible content of the filing is what makes me cautious. Concerns about the accuracy of Dell's prior margins will probably prevent any meaningful bounce in the stock today vs current $22.90 level.

Thursday, March 29, 2007

Calls of Note Part 5

Couple of more comments on Apple (NASDAQ:AAPL):

- Prudential completed a tear-down analysis of the Apple iTV, which was released into the North American market last week.

The iTV looks like a scaled down PC. Intel's Crofton MPU (looks like a Dothan) and Calistoga chipset drive the device, along with NVidia's GE Force Go 7300 GPU. Broadcom's 802.11n WLAN chipset is in the version theypurchased, as is Realtek's Audio Codec and Fast Ethernet LAN controller.

On the memory side, Nanya and Samsung are the largest suppliers of DRAM, while Toshiba supplies a 40GB HDD. Other components are from Linear Tech (analog), Marvell (HDD SoC), International Rectifier (FETs), Cypress (Clock Chip and flash controller), Intersil (CPU voltage regulator), and Texas Instruments (analog and HDD motor controller).

While the Apple iTV is a high-visibility design win, they do not expect it to change the economic fortunes for most of its suppliers. PEG's Senior IT Hardware analyst, Jesse Tortora, who covers Apple, is forecasting only 800,000 and 1.8 million units to be shipped in 2007 and 2008, respectively.

- Morgan Stanley comments on PC's saying unit demand rebounded in February after a meaningful slowdown in January due to consumers waiting for Vista loaded PCs until late January. Total U.S. PC unit growth rebounded to a healthy 23% YoY in February, in-line with December 2006 growth. AAPL is the only vendor that appears unscathed by the Vista transition. Continued Mac momentum and strong double-digit iPod growth in the Q give them confidence that AAPL will beat expectations in the March Q.

Notablecalls: Not actionable but good to know category. Please scroll down for additional commentary on AAPL.

Calls of Note Part 4

- Bank of America notes that at an Analyst event, Intel (NASDAQ:INTC) released details regarding its upcoming Penryn family of products, slated for introduction in 2H07. It also simultaneously disclosed key elements of its new microarchitecture, Nehalem, slated for introduction in 2008.

Penryn - driving higher performance at potentially lower costs. The improvement in performance (20-45% vs. existing processors, in certain applications) will likely blunt the improvement that AMD will witness from its upcoming platform (Barcelona) launch. Intel's cost leadership vs. AMD will, in firm's view, be further extended given Penryn's smaller footprint (die size) of 107mm2 vs. existing Core 2 products (143mm2). The cost and performance advantage, they think, has positive implications for Intel's ability to maintain margins while simultaneously building on share gains vs. AMD.

Nehalem - a game changer for Intel. With Nehalem in 2008, Intel essentially addresses bottlenecks associated with its prior architecture (particularly in high end servers), by utilizing an Integrated Memory Controller approach in conjunction with Configurable System Interconnect Architecture - similar to AMD's approach with Opteron. Nehalem also integrates a graphics core onto the processor silicon - an event that is occurring sooner than expected and should allow Intel to see modest expansion of its share of bill of materials in a PC. Nehalem nullifies AMD's remaining advantage in the multi-processor (high-end) server market.

Maintains Buy and $28 tgt on INTC.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 3

- Prudential is reiterating their Overweight rating and maintaining $18 Price target on Great Wolf Resorts (NASDAQ:WOLF). Firm believes the stock is relatively inexpensive as they remain comfortable with their estimates and management guidance. As private equity interest remains high in the lodging/leisure space, they continue to view WOLF as a potential takeout candidate.

Concerns about a slowing consumer spending, sub-prime spillover, and rising gas prices have dragged on the stock. While the company has Midwest exposure, it continues to decline as a percentage of the business and by the end of 2008, it could be less than 20% of EBITDA, based on the current pipeline. Out of the gate, WOLF stumbled since their Winter 06/07 opening in Mason, OH given patron and employee health complaints potentially caused from the water's chlorine in the waterpark. Management's immediate response to this issue was a positive as management and health officials say conditions have improved at the lodge.

Prudential still thinks the company is close to announcing several new Great Wolf locations in the next few months. They believe Great Wolf makes sense in higher density markets, particularly when next to incremental traffic drivers (lifestyle centers/major outlet malls/theme parks, as well as other tourist attractions). They think that filling the pipeline adds to the story and turns WOLF into a growth vehicle and not just a turnaround story.

Notablecalls: One for investors. WOLF has created a nice concept and by expanding will likely generate some nice return for shareholders.

Calls of Note Part 2

- RBC Capital is out with a wonderful call on Zoltek (NASDAQ:ZOLT) saying they elieve carbon fiber (CF) as a raw material to the wind industry is tracking similar to silicon and the solar industry two years ago. Firm believes Zoltek is in a parallel commodity cycle position as the incumbent silicon producers (ie MEMC Electronic Materials) were in early 2005 as the solar industry started to develop. Today, with the wind industry, the rapid replacement of fiberglass with CF in the production of longer turbine blades (which generate more power per $ invested), is driving RBC's estimate of 45% CAGR of CF.

The dynamics in silicon in 2005 and CF today are the same: both industries produce a commodity product required for an explosive growth end market, both of which happen to involve alternative energy. The barriers to entry are not huge: making silicon or CF is not limited by some resource in the ground - new entrants, which the firm fully expects in both industries, is only a matter of capital, time to construct capacity, and the conviction that demand for higher volumes is sustainable.

Before the cycle expands with more players, the incumbents have the ability to lock in long-term contracts, and leverage pricing power that can generate significant margin upside. Zoltek is one of very few wind-derivative plays in the U.S. equity market, has cost and capacity ramp advantages vs. new entrants, and is best positioned to capitalize.

RBC's new $45 target (up from $32) represents a 27x P/E multiple on their calendar 2008 EPS
estimate of $1.67. Maintains Outperform.

Notablecalls: The call makes perfect sense but on the other hand one has to respect the trading dynamics. I expect to see some buy interest in ZOLT today possibly followed by a pull back in price over the next week or so. The stock has gone too high, too fast. At least for my taste.

Calls of Note Part 1

- Piper Jaffray was out yesterday afternoon with comments on Apple (NASDAQ:AAPL) after NPD released its monthly sales tracking data:

The firm notes that analysis of iPod NPD unit data for the months of Jan & Feb leads them to expect an iPod range of 10m-11m for the Mar-07 quarter (PJ model calls for 10.3m iPods and they believe Street consensus is ~10.9m). After the first month of March quarter data (January), they had been pointing to a range of 11m-12m units. Data for the month of February, however, fell slightly from January, for both Apple and the market overall, which is inconsistent with what they have seen in previous years from January to February.

While iPod units fell slightly m/m in February, this downtick was in line with the overall MP3 player market. iPod market share was unchanged from January to February at ~70%.

Piper says they believe investors should supplement these data points with other information. It is also important to note that international iPods are not captured in this data, international had a material positive impact on iPod units in the December quarter. Maintains Outperform and $124 tgt.

Notablecalls: The call hit around noon and looking at yesterday's chart one can certainly spot the damage it did to the stock price. Must say this is something I have been suspecting for quite some time (Please see the archives for further color). The upcoming iPhone is hurting iPod sales. Not to mention the fact almost everyone already has an iPod. I think some pretty sizable short positions were put on following Piper's call yesterday and while there will be some bounces, AAPL's a short here.

Paperstand (DE, TTWO, ABT, CHK)

The WSJ’s ”Heard on the Street” column out saying that shares of Deere (DE) have been riding high on the fumes of the ethanol boom, but that intoxication could soon level off. Deere's shares are up 40% since the beginning of Sep, buoyed by ethanol-induced euphoria and near-record crop prices. But some analysts think the stock price may already have the positive outlook for farm equipment baked in. Robert McCarthy, of Robert W. Baird, thinks Deere's stock is starting to look expensive. Shares of Deere were trading at 16.7x Mr. McCarthy's estd EPS for the next 12 mo’s, he wrote in a note to investors last month. That is above the highest forward P/E ratio for Deere based on the consensus est the stock achieved the last time corn prices were this heady a decade ago. Baird has a Hold rating on Deere.

“Ahead of the Tape” column reports that the board of Take-Two (TTWO) is likely to get the heave-ho today from a group of dissident shareholders. The hope is that fresh faces will right Take-Two's ship after years of missteps. Those hopes may be baked in to shares, up nearly 20% YTD to about $21 - pretty pricey, relative to expected earnings; the stock's forward P/E ratio is 27. That's a lot to pay for a co that has been a one-hit wonder. Grand Theft Auto has been Take-Two's cash cow ever since GTA III's introduction in ‘01. Take-Two is releasing a new version, GTA IV, in Oct, but sales may not stack up to past hits. The introduction of expensive next-generation machines such as Xbox 360 and PlayStation 3 could limit sales, b/c fewer gamers use them and GTA IV will be compatible only with the latest consoles. Todd Greenwald, of Nollengberger, figures Take-Two will sell just 5m units of GTA IV in the 3 mo’s after its rollout, compared with 3-month sales of 12m for the previous version. To call the stock a grand theft would be a cheap shot. But investors should keep their hands on their wallets for now.

Barron’s Online highlights Abbott (ABT), whose shares are up 30% in the past year. Still, the stock may not reflect the earnings potential of its new stent, two cholesterol drugs that could hit the mkt next year and increasing sales of the blockbuster rheumatoid arthritis drug, Humira. Some analysts say Abbott's profits could increase as much as 15% annually over the next 3 years, a nice figure compared to relatively paltry earnings growth from the broader mkt. "I wouldn't call the stock cheap, but you're paying a reasonable multiple for shares of a co with earnings expectations it will probably beat," says Bryce Hill, of Oppenheimer. "If things go well with the new stent, Humira and the new drugs, it's reasonable that the stock could trade at 70 a share," Hill adds.

“Inside Scoop” section reports that Aubrey McClendon, Chmn and CEO of Chesapeake Energy (CHK), has been a persistent buyer of shares of the co. On March 22 and 23, he plunked down another $6.1m to purchase 200K shares on the open mkt. McClendon now beneficially owns about 26m shares. Meanwhile, Richard Davidson, appointed a director a year ago, bought 10K shares for nearly $300K, boosting his stake to 32,500 shares. Jonathan Moreland, of, says McClendon's purchase is consistent with the robust insider-buying that is cropping up across the energy sector. "Chesapeake has been a quality co in the past, and I think it will do well in the future, as the industry trend is bullish," says Moreland. Ben Silverman, of, says that if the stock stays above $27.50, McClendon "picks up some easy income" through short puts he has sold on 85,600 shares.

Wednesday, March 28, 2007

Calls of Note Part 5

Somewhat to my surprise, two firms are out with positive comments on American Commercial (NASDAQ:ACLI), with one calling the stock a table pounding buy:

- Merrill Lynch notes American Commercial Lines shares are down over 20% from their peak in late February on 1Q07 concerns due to soft spot market grain rates and weather delay days. ACLI's shares are currently trading at 15.8x firm's revised 2007 and 12.8x 2008 EPS estimates, below the 16x historical forward P/E for the barge sector, and a discount to the 20x forward multiple for the Jones Act sector. MLCO believes that the pullback represents a buying opportunity and reiterates Buy opinion and $41 price objective.

Harsh winter weather in February caused the Illinois River to freeze over for almost three weeks, resulting in a significant decline in volumes in the month. While the firm estimates that those volumes likely shifted to truck or rail, tonnage in the first three weeks of March rebound sharply, up 28% both year-over-year and above the three-year average.

Firm is lowering 1Q07 EPS estimate from $0.24 to $0.19, and 2007 EPS from $1.92 to $1.90, as an expected recovery in 2H07 did not offset the volume impact from weather in the first quarter.

- Stephens calls ACLI a table pounding buy. Why has the stock pulled back recently? Concerns regarding a difficult Q1 comp are well known at this point, but they believe it has created some confusion in the market. 1) Could the Company miss Q1 and lower '07 guidance? Firm is comfortable with their $0.20 estimate for the quarter (the same as consensus, which has come down recently), but believes the full year cannot be judged on Q1 results (the seasonally weakest quarter, approximately just 10% of annual EPS). In fact, they would point out that management's guidance for '07 ($1.75-$1.95) already factors in a seasonally weak Q1, but also assumes organic growth will be flat.

2) Spot pricing is down y/y. When looking at spot rates on a y/y basis, spot grain rates are down 5% (as a result of the post Hurricane Katrina comps last year). While grain is approximately 30% of the Company's business, the other commodities remain strong, particularly liquid. 3) An increasing short position (approximately 7.5MM shares are now short, representing 12% of shares outstanding, an increase from 6.8MM shares short in January). 4) The CEO recently sold approximately 400,000 shares of stock (diversifying his portfolio). Firm would point out that he still has over 300,000 shares remaining, and they find it highly unlikely that he would sell ahead of a bad quarter.

Maintains Overweight and $50 tgt.

Notablecalls: Not going to call this one outright actionable as there are no price levels of interest anywhere near. Ideally, I see the stock selling off some more after open and then squeezing higher. Let's see if the market can put together such a scenario.

Calls of Note Part 4

- Merrill Lynch comments on Vertex Pharma (NASDAQ:VRTX) saying the co is expected to provide updates on VX-950 (telaprevir) at the upcoming EASL meeting. The late breaker abstract by McHutchison et al., on Saturday, April 14 will receive significant scrutiny as it provides a 12 week post therapy update for PROVE 1. While the firm is not surprised by declines ahead of EASL, they consider the current sell-off to be overdone, especially if strong efficacy from 12 week triple therapy + 12 week dual therapy could be disclosed in H2/2007.

While they cannot rule out further declines, they believe current levels represent an opportunity for patient investors. MLCO believes that the stock could recover to the low-mid $30's in near term given a combination of strong PCR negative rate approaching 75% and no meaningful changes in the trends for safety/dropout rates, with the potential for further appreciation in the next 12 months pending strong data from the 12+12 arm.

Firm recommends buying April US$30.00 call options ahead of the follow-on PROVE 1 data as a way to enter into a stock position for the long term while hedging downside risk.

Notablecalls: I'm somewhat surprised to see such a sell-off in VRTX. Clearly, the co is a takeover candidate for big pharma. I like this call.

Calls of Note Part 3

- Morgan Stanley notes that with its core business still under pressure, another acquisition with issues, and managerial turnover, they remain Underweight on Check Point (NASDAQ:CHKP). And all this sounds very familiar; deals lost in the enterprise in major existing accounts and US Government concerns impacting yet another acquisition likely pressures the stock in their view - just like 2 years ago. All in, it seems like deja vu all over again. A likely disappointing top line in 2007 from at least $10 million in lost PointSec sales along with execution issues will lead CHKP shares to underperform the markets, in their view, as these factors expose the consensus opinion for better growth as less than accurate. Firm recommends investors sell CHKP shares else, lest history repeat itself for the second (perhaps third?) time this decade.

Larger vendors have steadily gained share in large enterprise deals, including several additional Fortune 20 accounts we recently learned of. Cisco and Juniper embedding functionality are steadily absorbing NG platform accounts and there's no one to navigate the ever-turbulent security waters - just a few officers with no crew.

As Checkpoint has suggested better growth from acquisitions and core stability, firm's checks have found this to be far from the reality. MSCO's2007 estimated revenues $13mm below the street reflect their estimate of the real momentum or lack thereof for the company, hence they reiterate the UW rating.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 2

- Citigroup says that based on checks, they do not believe comps at Whole Foods (NASDAQ:WFMI) have improved from the 7% reported in 1Q07 despite modestly easier prior yr comparisons in 2Q07 (comps were up 11.9% in 2Q06 vs. up 13% in 1Q06). Firm thinks this is due in part to competition by conventional supermarkets.

Given the lackluster trends, they are lowering their 2Q and 07 comp est to 6% from 7% previously. This is at the lower end of guidance of 6-8% comp growth in FY07. Firm is also lowering their FY07-09 EPS by 4c, 6c, and 10c, respectively.

Given lower EPS estimates and lower target multiple which reflects weak trends, they are lowering their target price by $8 to $49. Maintains Hold.

Notablecalls: Looks like more downside in store for WFMI. Not an outright trading call, though.

Calls of Note Part 1

- Goldman Sachs maintains their Neutral coverage view on the Homebuilder sector as they believe the stocks are unlikely to rally sharply from current levels despite many larger-cap stocks bumping up against an historical entry point of 1.0X price-to-book value (P/BV). Weak order activity from Lennar reported yesterday coupled with comments from management that the Spring selling season pick-up has not come through as hoped are likely to weigh on investor sentiment, off-setting the potentially enticing stock valuations.

Beazer Homes (NYSE:BZH) responded to news reports last night that it is the subject of a
widespread investigation involving lending practices as laid out in recent articles published by the Charlotte Observer. Although Beazer denied the allegations of wrong-doing as outlined by the Charlotte Observer stressing that it has acted as a mortgage originator, not an underwriter, the presence of such allegations coupled with comments attributed to an FBI agent on the investigation are likely to weigh on Beazer shares. With the stock trading at 0.75X P/BV prior to last night's reports, the firm maintains their Neutral rating on BZH shares.

Notablecalls: BZH was down over 5 pts in after hours action. That's a 17% haircut on some pretty vague investigation news. Given the almost 20% short interest, I'm inclined to believe the stock was pushed down. OK, for example's sake, let's say youre an institutional trader with a 300K short position in the name. 20 minutes after the close the CNBC reports of potential FBI investigation at BZH. You take a deep breath, switch on your ECN platform and use another 30-50K stock to push BZH down in after hours, hoping some of it will stick on open. As you hit the bids, the stock goes down as noone is willing to set up in front of a potential investigation. If youre lucky, the analyst community will reiterate their cautious stance in the morning and you can easily cover your 300K shares for an extra 5 pt profit. Heck, why not go long 50K after youre done covering! BZH's valuation's way below that of peers and once the panic sellers are done the stock will probably squeeze higher.

Anyway, I suspect the $26 level reached in after hours may provide a nice s-t bounce oppy for aggressive accounts.

Color on quarter: Xyratex (NASDAQ:XRTX)

Couple of firms comment on Xyratex (NASDAQ:XRTX) after the co released its Q1 results last night:

- Baird notes XRTX reported FQ107 revenue/EPS results of $236 million/$0.40, ahead of consensus of $230 million/$0.31, on stronger-than-anticipated revenue and gross margins. The firm is encouraged with the continued fast growth in the systems business (27% YOY), and healthy infrastructure margins.

Management provided FQ207 guidance of $203-$218 million/$0.09- $0.19, slightly below consensus estimates of $210 million/$0.16. Given the unchanged outlook for F07, the firm is leaving their estimates unchanged.

Baird believes both STX and Hitachi represent meaningful upside opportunities, although the timing is unclear. To the extent STX is not able to re-use existing MXO equipment, it will need to purchase new equipment from XRTX, which could result in upside in the next two quarters. Management reiterated expectations that Hitachi business will not meaningfully add to revenue/EPS until F08; however, the firm suspects Hitachi's recently announced plans to refresh 75% of its product line-up in C2007 could accelerate capital spending on XRTX equipment as Hitachi attempts to transition manufacturing operations to lower-cost geographies and optimize manufacturing procedures.

Maintains Outperform rating as XRTX is s attractive with a valuation of 11x C08E EPS, beatable forward estimates, growth opportunities with STX and Hitachi, and a stable, fast-growing systems business.

- RBC Capital notes Xyratex posted healthy February 2007 quarter results, beating Street consensus on the top line and the bottom line.

The lower-than-expected fiscal 2Q07 non-GAAP EPS forecast relates to slightly higher-than expected operating expenses and tax rate (due to lower mix of Storage Infrastructure revenue/ income which carries a 0% tax rate). For FY07, Xyratex continued to position its Storage Infrastructure business as volatile but positive. However, the exact timing of Seagate orders remains difficult to forecast, as it completes the Maxtor integration efforts. Notably, Xyratex's Networked Storage Solutions revenue guidance for fiscal 2Q07 includes NetApp growth of 4-5% (past two years, NetApp has posted ~15% sequential growth).

Firm maintains 12-month price target of $25 saying they assume a probable, though not certain, upside/downside scenario of $30/$14 on above/below consensus execution. On a 12-month basis, they continue to rate Xyratex shares Outperform.

Notablecalls: Tough to call this one. Looks like a non-event.


The WSJ reports that DoubleClick is exploring a sale, and is already in active talks with Microsoft (MSFT), among other potential suitors. The co is using investment bank Morgan Stanley to help sound out its options, including a possible stock-mkt listing. The co is majority-owned by Hellman & Friedman, which since purchasing DoubleClick in ‘05 for approximately $1.1bn, has sold off a number of divisions and reshaped the business. Hellman is seeking at least $2bn for DoubleClick, and it remains an open question whether the firm will choose to complete a deal.

“Heard on the Street” column out saying that reinsurers that sold hurricane coverage last year won the wager; they pocketed hefty premiums, paid few claims and watched their share prices rise. Now, some are moving to reduce their risk by buying or merging with rivals. The main argument for consolidation: increasing pressure on reinsurers to limit their exposure to any one type of disaster by selling a more diversified range of policies. With the US hurricane season kicking off in roughly 2 mo’s, the time for action might be now. According to the article, Scor (SCO) plans to launch a hostile tender offer for Converium (CHR) next month to gain more mkt power and broaden its risk portfolio. Analysts and industry veterans alike believe the incentives to consolidate will endure. "I think this will extend out for more than just a year or two," said Bill Yankus, of Fox-Pitt. Other dealmakers mentioned include ENH and MXRE.

Barron’s Online positively out on Broadcom (BRCM), whose stock is down 26% in the last 12 mo’s. With all awful developments now behind it (investigations, MOT warning), Broadcom can welcome incoming CFO Eric K. Brandt with a stunning balance sheet consisting of $2.8bn of cash and marketable securities, no debt and a cash flow statement that added $721m last year. The recent drama has left Broadcom shares at a reasonable P/E multiple of 21x ‘08's projected earnings, near its lows over the last 2 years, as CEO Scott A. McGregor leads the co's advance into the fastest-growing mkt for semiconductors, the cellphone. "They continue to be very strong in executing plans to enter new chip mkts, and they consistently out-engineer many other chip co’s," says J.P. Morgan chip analyst Shawn Webster, commenting on why he initiated coverage of Broadcom in late Feb with the equivalent of a Buy rating.

“Inside Scoop” section reports that one director at Johnson Controls (JCI) has made a $6m bet that there is still upside to the co’s stock price. Eugenio Clariond made his latest purchase on March 23, when he paid $3m to purchase 31K shares of Johnson Controls. The latest buy came just 5 weeks after another $3m purchase on Feb. 14. Ben Silverman, of, says that Clariond's $6m splurge is a "bullish bet on the co being able to boost its building efficiencies and power-solution businesses as the automotive business deals with industry problems."

According to the DigiTimes, citing Samsung Electronics' semiconductor business president Chang-Gyu Hwang, the overall memory mkt which includes DRAM and NAND flash should head towards more positive prospects in the 2H07 with DRAM demand expected to warm up while NAND flash shortages are about to arrive in the mentioned time frame.

Tuesday, March 27, 2007

Calls of Note Part 7

- Cowen notes they believe that Enterprise-focused telecom carriers increasingly must have managed hosting to compete, and Savvis (NASDAQ:SVVS) is the best target in the market. Acquisition is also likely the easiest exit for 50% holder Welsh Carson. Firm views Verizon as the most likely buyer, but sees Level 3 and others as possibilities. They expect 19% outperformance relative to the market over the next 12 months without an acquisition. A deal in the near term could be at a similar price.

To compete with AT&T, which is a top provider of hosting and co-location, the firm believes other enterprise-focused telecom carriers must strengthen their managed hosting offerings.

Cowen view VZ as the most likely buyer. Savvis's hosting would fill in the blank left by MCI's limited hosting offering, putting VZ more on par with AT&T. LVLT also has a strategic need for hosting such as Savvis, but has less capability to pay cash. Other backbone operators such as GLBC could also consider Savvis.

Most acquirers could transfer Savvis traffic to their own network and shut down the Savvis network, eliminating virtually all network costs.

Notablecalls: Expect to see buy interest in SVVS today and over the next week as it's not every day that you hear a firm saying a co is an acquisiton tgt will be gone by yearend.

Calls of Note Part 6

- Piper Jaffray is very positive on F5 Networks (NASDAQ:FFIV) saying that following discussions with numerous F5 resellers, they believe demand for the company's products have been exceptionally strong in the U.S. during the March quarter, and they anticipate another solid domestic quarter for the BIG IP product family. Firm also believes F5's federal business in this geography remained stable and do not anticipate any meaningful deterioration from this vertical.

While they have picked up a few data points suggesting some pockets of weakness in EMEA, only 17% of F5's revenues come from there and the firm believes this small relative exposure will be dwarfed by the strength they are picking up on in the U.S.

Firm's channel checks in December revealed a robust pipeline, and they believe numerous deals were purposely pushed into the March quarter. This, coupled with recent channel checks, gives them a high degree of confidence that F5 will likely beat estimates and guide above consensus for the June quarter. F5's new high-end products are gaining momentum and the firm believes this trend will continue throughout 2007 due to the explosive growth in data center traffic. The BIG IP 8400 was introduced in March 2006 and should regain momentum this quarter. Reits Outperform and $100 tgt.

Notablecalls: For some reason FFIV was very weak in yesterday's session. Think this is what prompted Piper's call. Ideally, I see FFIV gapping lower and then squeezing higher.

Calls of Note Part 5

- Merrill Lynch notes they recently met with various executives of Motorola's (NYSE:MOT) Connected Home division (8% of revenues) and found the division fundamentals to be stronger than originally anticipated. Five takeaways:

1) Motorola's set-box business appears more secure than perceived by the Street. MLCO finds some 707-related inventory buildup in low-end STBs, but demand for HD and DVR boxes still exceeds supply.

2) Growth to continue over the next 18 months. Contrary to the common view, the firm believes the July 1 separation of security in the STB will result in strong revenue growth over the next 18 months as the new rule results in an increase in the price of a set top by $50 and carries the same margin.

3) Limited inventory correction in 2H. Firm believes demand for high end HD and DVR set-top boxes is high. They see some inventory buildup in low end boxes ahead of the July 1th deadline, yet the short correction period should be offset by strength in high end units.

4) They believe the division is almost finished with its M&A spree, outside of small acquisitions that may address certain niches.

5) Margins to remain at current levels. We expect operating margin to remain relatively stable, within the 12-14% range, following a substantial improvement from 6.5% in 4Q05 to 12% in 4Q06.

Firm estimates that sales of set top boxes accounts for ~70% of Connected Home division revenues, while video head-end equipment sales account for about 5-6%. They estimate that modems account for another 10-11% and other infrastructure products (CMTS/GPON/other), consumer products (cordless phones/security cameras/etc.), and services account for about 14-15% of revenue.

Notablecalls: Well, it's certainly been a while since I've seen any positive comments on MOT. I continue to be a s-t bull on the stock. Please see archives for further color.

Calls of Note Part 4

- Stanford comments on Brooks Automation (NASDAQ:BRKS) after co's software product line sale to Applied Materials clears last anti-trust hurdle. Firm notes the sale should net BRKS $1.50/sh in cash. In addition to its existing $2.50/sh, the company is now cash heavy with significantly more than it needs to effectively run the business. Firm believes this sale is the lynchpin in finalizing a major cash distribution/stock buyback strategy, which they believe will be announced when BRKS reports its 2Q07 financial results, tentatively scheduled for May 9th.

BRKS will close the Mar Q with about $200 mil in cash but will receive another $115 mil. when the sale of its software product group to Applied Materials closes, expected in early April. At its current run rate, BRKS is generating $25 mil. cash/Q. Thus, mgt. believes that BRKS will exit the September fiscal year with close to $400 mil. in net cash ($5.30/sh, about 33% of market cap). Management believes it needs $100 mil. to run the business and another $50-$100 mil. for opportunistic acquisitions, leaving $200+ mil. to possibly return to shareholders.

Firm believes the best alternative for investors, a major positive for the stock and the most likely scenario would be an accelerated buyback > $100 mil. announced at Mar. Q earnings release. Such a buyback would be accretive to earnings. The institution of a small (< $0.05/share/Q) dividend would also be a significant positive catalyst for the stock. No buyback and/or small ongoing dividend may connote to investors internal, undisclosed problems for which the company is hoarding cash, clearly a negative.

Notablecalls: Not actionable but good to know category.

Calls of Note Part 3

- Merrill Lynch notes QLogic (NASDAQ:QLGC) has sold off since January due to concerns over slowing growth in the FC-Switch business and speculation surrounding a potential miss for the Mar-07Q. However, at 15x CY07e EPS (ex-cash), the stock appears to be pricing in a miss already. MLCO expects the switch business to regain momentum in 2H and see upside potential from InfiniBand. They think additional share buy backs are also likely and believe the risk/reward is favorable for investors with a 2+ qtr horizon.

They expect HBA revenues (85% of sales) to grow in the low to mid teens over the next few years. The Fibre Channel market appears healthy and the firm expects the 4G transition to continue for the next few quarters. Though virtualization is beginning to impact server unit growth negatively, it should have a positive impact on HBA growth as virtualization accelerates the transition to storage area networking.

Despite the recent disappointment in the FC-switch market (12% of sales), the firm continues to believe that QLogic will benefit from the BRCD/MCDT merger longer term. InfiniBand is a new opportunity for QLGC and they expect revenue ramps from this product line in the next 1 - 2 quarters. QLGC has multiple design wins and is well positioned to gain share in this $300M market. Firm thinks street expectations for this business are conservative and see upside potential in 2H07. Reits Buy.

Notablecalls: Would not be surprised to see some buy interest in QLGC over the next week or so. The stock has been lagging the general tech group and may have around $1 worth of upside in it. Not a high conviction call.

Calls of Note Part 2

- TWP notes today's CPU environment is a difficult one, particularly with the aggressive ongoing price cuts between Intel (NASDAQ:INTC) and AMD. The firm is incrementally more positive on Intel, however, given their findings regarding its long-term server road map, and particularly the Thurley platform. They believe that the dramatic change in architecture (i.e., integrated memory controller and CSI) bodes well for the company as it transitions off of the Bensley platform in 2H08.

Intel will introduce its next-generation server platform named Thurley in 2H08 and will feature the Gainestown processor and Tylersburg chipset. Most of the time, a platform upgrade represents an evolutionary step forward-however, they view the introduction of Thurley as a revolutionary change and dramatic improvement in Intel's core system architecture.

Gainestown-Intel's masterpiece in the works: Similar to Barcelona, Gainestown will be a monolithic quad-core processor in the Nehalem family and will be manufactured at a mature 45nm node. The most dramatic architectural changes, however, lie in the use of Common System Interface (CSI) and an integrated DDR3 memory controller (iMC). CSI is a coherent, point-to-point interconnect (similar to AMD's coherent HyperTransport), and replaces the aging Front-Side Bus (FSB). Gainestown will also feature a shared 8MB cache, improved power efficiency and Hyper-Threading capabilities. Firm's checks on Gainestown have come back extremely favorably, with OEMs and systems builders particularly excited about the adoption of the DDR3 iMC and CSI.

The firm is incrementally more positive on shares of Intel given the shift in market momentum toward Core 2 products (i.e., Woodcrest, Clovertown, Conroe and Merom), and are further encouraged by Intel's longer-term road map, particularly on server. Given the current aggressive pricing environment, however, they believe that pricing will weigh on margins in the near term. Despite trading below the historical average P/E of 23x, they believe that shares are fairly valued, trading at 15x 2008 EPS estimates of $1.25. Maintains Market Weight rating on shares.

Notablecalls: Not actionable but good to know category. Goes to show how little head start AMD has with their Barcelona.

Calls of Note Part 1

- FBR notes they continue to recommend shares of Urban Outfitters (NASDAQ:URBN) as their top growth/momentum pick and are now adding to the FBR Top Picks list. Firm notes they have seen consistent progress at both divisions throughout March; they believe that comps quarter-to-date remain in the slightly negative range (but have been positive in recent weeks) at the Urban Outfitters division and in the positive low to mid single digit range at the Anthropologie division. They believe that margins are up dramatically over last year as tight inventory control limits downside margin risk.

They believe that if the company posts positive comps in 1Q07 and beats 1Q07 earnings, the stock will continue its upward momentum. Notes the announcement of a 4.5M share sale by Chairman Dick Hayne has put pressure on the stock. Firm believes this liquidation is an isolated event and is not indicative of massive insider selling; they do not feel that he would liquidate in the face of pending bad news in today's litigious environment.

Firm is raising their FY07 estimate from $0.85 to $0.90 and FY08 estimate from $1.02 to $1.17. They believe that shares of URBN should be valued in line with a three-year EPS growth rate of 30%. FBR's $35 12-month price target values URBN at 30.0x FY08 EPS forecast of $1.17.

Notablecalls: It's fairly quiet out there this AM, so I thought to highlight it. Not actionable but good to know category.

Paperstand (SMG, URBN)

The WSJ’s ”Heard on the Street” column highlights Scotts Miracle-Gro (SMG), whose execs took a cold, hard look at their business and figured they could do with a lot more debt. "We felt like the moons were aligned, and so we went for it," says CFO Dave Evans. The co obtained $775m in additional debt and paid out $750m to its shareholders by distributing a special dividend and repurchasing a chunk of its shares. A number of public co’s are taking a leaf out of the playbook of private-equity firms and loading up on debt to improve returns for their shareholders. In doing so, they are taking on more risk and making big bets that they will stay profitable for years to come. The credit mkts have been hospitable to most fund-raising efforts, though there are signs that debt investors are becoming less accommodating and are starting to push corporate interest rates higher. During the past few months, Domino’s Pizza (DPZ), Health Mgmgt (HMA) and Dean Foods (DF) also unveiled plans to take on significantly more debt and distribute much of their cash to shareholders through dividends or buybacks. Proponents of such "do-it-yourself buyouts," also known as leveraged recapitalizations, say they make public co’s more efficient and may help increase their bottom lines in the long run.

Barron’s Online highlights Ivy Global Natural Resources Fund top holdins. Those include COP, VLO, RIO, DO, BTU, APD, GFI, NE, ACI and BHI.

“Inside Scoop” section reports that Urban Outfitters (URBN) Chmn and President Richard Hayne sold off close to 10% of his holdings in the co he co-founded, taking advantage of a pricey valuation to stitch up sizeable gains. From March 21 to 23, Hayne disposed of 4.5m shares for $114m on the open mkt. That trimmed Hayne's holdings to 39.3m shares, or a 23.9% stake. Mark LoPresti, of Thomson Financial, says, "This is the largest sale since 1993," when the co went public, in terms of dollar value for any year or for any individual. It is Hayne's 2nd-largest sale in terms of share count when taking into account four 2-for-1 stock splits since 1996. Ben Silverman, of, says there are a number of mitigating factors regarding Hayne's sales, such as, "he takes minimal amount of cash compensation and he isn't loaded up on options."

Monday, March 26, 2007

Calls of Note Part 6

- CIBC's Amit Hazan has some interesting comments on Digene (NASDAQ:DIGE) following news that BEC plans to acquire BSTE for $85/share (a 55% premium). CIBC feels the uncanny similarities between the Biosite and Digene stories are important to learn from, and they see the long-term acquisition value inherent in DIGE at a time when the diagnostic space has become very acquisitive.

BSTE had a virtual monopoly on the BNP diagnostic space until competition entered during 2003-06 (Bayer, Roche, Abbott, Dade, JNJ, DP). While the stock succumbed to competitive noise on more one occasion, the weakness proved to be a buying opportunity time and time again.

DIGE is stronger than BSTE on almost every metric today, has a stronger market position than BSTE ever did (mainly due to IP), and won't have competition until '09-'10. If one extrapolates the BSTE acquisition multiple, the value in DIGE today becomes quite evident.

BSTE is being acquired for 4.8x TTM sales, 4.5x '07E sales, and 4.2x '08E sales. These multiples on DIGE imply a takeout of $49/share on '07E sales (+24%) and $56 on '08E sales (+40%). No analogy is perfect, but investors should know their med device history and be prepared for a repeat.

Maintains Sector Outperformer and $58 tgt on DIGE.

Notablecalls: While I usually refrain from posting comments during the trading day, I think
the work Amit Hazan has done on DIGE is just too important to ignore. Please see archives for further color on the stock.

Calls of Note Part 5

- Deutsche Bank is downgrading CV Therapeutics (NASDAQ:CVTX) to Sell from Hold ahead of full Ranexa Merlin PIII data to be presented at the American College of Cardiology (ACC)
on Tues, 3/27.

Firm now believes Ranexa ACC data will fall short of generating sufficient positive data trends for supporting Ranexa's outlook even as an approved niche chronic angina agent. Failure to achieve Merlin's efficacy endpoint (orig disclosed 3/6) of composite CV-related death, 1st occurrence of MI or recurrent ischemia and potential lack of clear positive trends on secondary endpoints would be expected to have an adverse impact on current Ranexa sales trends. Ranexa's comparable safety profile v standard of care is not enough to make Ranexa's profile compelling on a reward/risk analysis in their view. DB is lowering 2007-10 Ranexa sales projections to $48M, $58M, and $68M, and $78M, respectively.

As a result of Ranexa's diminished outlook they believe it may be difficult for CVTX to raise additional capital in order to support high operational expenses supporting Ranexa sales and expect increasing pressure on CVTX's ability to remain solvent.

Firm's new $2 PT is based on 2x 08 Ranexa sales of $58M and 58M s.o. CVTX currently has ~$270M or $4-5 cash/shr assuming 1Q07 burn, to be reduced as a function of operating expenses and the firm notes the $399.5M in convertible debt.

Notablecalls: Think the tgt cut will generate some jitters today.

Calls of Note Part 4

Stifel thinks Argon ST's (NASDAQ:STST) small SSTD deal is potentially worth much more in 2008 and beyond.

Last week Argon ST was awarded a $5.3 million contract modification to continue development work and sea trial certification of the AN/SLQ-25A/C, Surface Ship Torpedo Defense (SSTD) for the U.S. Navy to be completed over the next 14 months. The $5.3 million development contract itself is not material; however, since Argon ST is the sole-source provider for this device, a shift to product work could have a significant impact on revenue beginning in 2008 and continuing for an extended period.

There are about 200 25A units on U.S. Navy surface ships and 220 more deployed by allied forces. Firm thinks upgrade work on the 420 units to the 25C class could potentially be worth over $1 million per unit. In addition, they think it is highly likely that new 25C units will be produced. Stifel is not changing their forecasts at this time but believe more news is likely to surface as the development work and testing nears completion.

Firm's 12-month target price of $28 represents an EV/F07E EBITDA multiple of 13x. STST shares are currently valued at a multiple of about 11.5x. They think this is a conservative level as it is similar to that of Argon's public peers but far below recent M&A activity in the SIGINT/electronic warfare space. Maintains Buy.

Notablecalls: Interesting comments by Stifel's Stephen Levenson. I'd keep an eye on this one as the revenue impact could be a major one if Levenson's right. The chart looks like it wants to break out.

Calls of Note Part 3

- Merrill Lynchs notes Third Point LLC recently bought a 9% stake in PDL Biopharma (NASDAQ:PDLI) and, based on SEC filings, voiced concern over PDL's corporate and R&D spending. Third Point is seeking to place 4 directors on PDL's board and to bring in consultants to analyze spending. This may be just the opening salvo, but in firm's view, PDLI stock is undervalued precisely because they expect the company to make significant efforts to improve R&D yield either internally or through deals. With pipeline expectations emerging from a low point, any positive news will likely boost the stock.

Despite robust revenues and significant R&D investment, PDL has never launched a product from its pipeline. However, MLCO believes that the new chief medical officer and management are taking a hard look at the pipeline and that everything is on the table in terms of asset allocation and potential deals.

In any event, with a robust and diverse revenue stream and a refocused R&D effort, the firm believes the stock is undervalued. We expect significant pipeline and collaborative activity that ideally will yield commercial products sooner rather than later to contribute to the company's Vision 2010 goal of $1bn in revenue. Maintains Buy.

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

Calls of Note Part 2

Deutsche Bank is out with some fairly interesting comments on Motorola (NYSE:MOT):

How much would you pay for a Chinese maker of color televisions and toasters? Do you think there is a reason why General Electric has essentially exited the consumer electronics business entirely?

The firm thinks Dell and HP are as good a comp as Nokia, and that is not intended as a compliment. What are Dell and HP's operating margins? 6% - 7%. Still, the contrarians will argue that MOT has numerous unlocked gems, and its margin problems are nothing that a good restructuring cannot fix.

There is no easy way for Motorola to fundamentally alter its margins. DB thinks they will likely remain tied to economic and fashion cycles without some drastic action. Icahn Partners thinks the company will be forced to take this drastic action if they lever the company to the gills.

In all the sensitivity analysis the firm performed the key variable was margins for the handset business. They varied exit multiples, leverage levels and several others factors, but in the end Mobile Device margins were by far the biggest swing factor. Some of these cases offer truly appealing returns, and they understand how investors could find a case for buying the stock at these levels. In DB's view, more things have to go right than can go wrong to get to those returns. Put another way, the margin of safety on Motorola at $17.75 is slim.

The truly shocking thing to them about Motorola in 2007 is that there is so much missing. At 3GSM they had only one truly new phone "the flip-kick RIZR Z8", which is really not that exciting, and the fact that it is a Symbian device underscores how mixed up the company has become. Where is the SCPL? The market needs something new and the firm thinks its unlikely that Motorola will have anything in time for Christmas this year. They also think the personnel issues at Mobile Devices will prove challenging. We think it will be a few months before the middle management team there settles down. The group has a lot of very talented people, but its unclear who will stick around. With 66,000 employees Motorola has gotten to be an institution, and institutions do not design hot phones overnight.

Finally, one cannot rule out the possibility that Motorola is waging a brutal tactical campaign against Mr. Icahn's hostile offer. Things may not be quite as bad as they sound. Nonetheless, even if they are sandbagging him and the Street to give themselves room to make the necessary changes, its tough to deny that the company is not in as good of shape as it appeared three or four quarters ago.

Notablecalls: Call me a MOT bull here with a stop below recent lows. Despite the warning and the resulting pessimism (it was there before, with the warning acting as the confirmation), the stock managed to put together a bounce on Friday. That tells me there will likely be further upside to this one.

Calls of Note Part 1

- JP Morgan notes that following their successful seasonal call from Aug. '06 to Jan. '07, they have maintained a C1H07 trading range call with expectations for limited downside on valuation support and buybacks. The firm has also recommended buying semiconductor equipment stocks to prepare for a likely late 2Q/early 3Q upward inflection. In line with their thesis, they placed three stocks on the JPMorgan U.S. Equity Focus List and also introduced Share Gain and Margin Expansion Thesis. However, because they feel the odds of acute memory-related equipment demand weakness is fading and primary research suggests logic and foundry chipmakers are jockeying for C2H07 manufacturing slots, they are making the inflection call now.

Key Catalysts. 1) April Earnings Season - JPM expects it to be good with comments that memory is solid and the foundry outlook is better at the margin. 2) Memory Price Stabilization - Appears to be happening in Flash and the fir expects the same to occur for DRAM in C2Q07. 3) Visibility for increased Logic/Foundry Orders - happening at the margin now.

Also, it is firm's distinct impression that a large percentage, a large majority actually, of growth-oriented investors/institutions that they have met with are underweight semiconductor equipment and related stocks or are out altogether.

Tier One Top Picks on competitive share gain include OW-rated ASML (NASDAQ:ASML), Mattson (NASDAQ:MTSN), Ultra Clean Holdings (NASDAQ:UCTT), and Varian Semi (NASDAQ:VSEA). Tier Two Top Picks on segment share gain include OW-rated Cymer (NASDAQ:CYMI) and KLA-Tencor (NASDAQ:KLAC).

Time to Step Up to OW-Rated Lam Research (NASDAQ:LRCX). According to JPM, Lam has the same catalysts as above plus the likelihood of increased C3Q and C4Q shipment guidance during the April and/or July earnings seasons on improving Foundry demand.

Notablecalls: While I don't agree with this call fundamentally, I do recognize the trading dynamics surrounding these stocks. Watch LRCX today for some upside.

Paperstand (C, DELL)

The WSJ reports that Citigroup (C) execs are putting the finishing touches on a restructuring plan that is likely to involve around 15K job cuts and a charge against earnings of more than $1bn. The stakes are high for Citigroup CEO Charles Prince, who announced a cost-cutting review of operations late last year and has billed the outcome as critical to rejuvenating the co. Mr. Prince is facing mounting pressure from both inside and outside the co to reduce Citigroup's expenses, which are rising at a faster rate than rev, to deliver better financial results, and to drive up the co's stagnant stock price.

“Heard on the Street” column out on Dell (DELL), saying that Wall St wants the co to go on a crash diet to fatten up its stock price. Dell has enjoyed some of the PC industry's highest profit margins, but over the past few years, the co's operating expenses have rapidly increased, up more than 30% to $1.7bn in the past 2 years, while it has struggled to keep sales rising at the same rate. A major reason for Dell's bloated expenses: a soaring headcount. In the 2 years since Jan05, Dell's employee base has jumped by nearly 50%. In that same period, the co's rev rose 7%. Dell's operating margin dipped to 5.6% in FebQ, down from 8.2% yoy. Now Wall St. is saying that one of the PC industry's leanest co’s has gotten too flabby. Sunil Reddy, of Fifth Third Asset Mgmt, says Dell's expenses have to come down for its profits to go up. "I wouldn't be surprised if they announce some kind of work-force reduction plan," he says. Mr. Reddy says investors want to see Dell's operating margins rise to the 6% range. Chirag Vasavada, of T. Rowe Price Associates, says Dell needs to start "cutting heads or holding operating expenses steady and growing sales."

Sunday, March 25, 2007

Barron's Summary

Barron’s lines up most influential CEO’s. The ultimate CEO who matters is Steve Jobs, of Apple (AAPL). Jobs' departure probably would result in a greater loss of stock-mkt value than the loss of any other CEO in the world. Jobs might be worth 20 or so points to Apple shares, roughly $16bn.

Fund manager likes NLY, ANH, ORGN and OPX. Dislikes FMT, RATE, MCO and MHP.

Starbucks (SBUX) has skidded 20% since Nov, to the low 30s. But the stock could rally into the mid-40s as same-store sales and profit margins improve. "We are at the point where a long-term investor can make a strong case for buying the stock," says Marc Greenberg, of Deutsche Bank. "This is a great brand, with great pricing power, an excellent operating model and good prospects. And now the stock is much cheaper" than it used to be.

They've already jumped, but RadioShack (RSH) shares could rise 30% or more in the next 12-18 months if new chief Julian Day hammers costs further and gets the product mix right. "There is a tremendous amount of room to cut, and this is what ppl are missing," asserts Dennis Bryan, of First Pacific Advisors.

Barron’s discusses stocks with pending lawsuits. World Wrestling (WWE), American Express (AXP) and Qualcomm (QCOM) could be helped by court cases. MasterCard (MA) and Sherwin-Williams (SHW) could be hurt.

The Veterans Affairs is one of Uncle Sam's most efficient agencies but still must make improvements to provide adequate care. That effort should benefit patients…and the agency's contractors. Those include MCK, BDX, CPHD and RHHBY.

“The Trader” section discusses Apple (AAPL), saying that any day now Apple TV will debut in stores across the country. For $299, the digitally savvy can play music, movies and videos stored on a home computer through television. Given the unknown potential, many analysts have yet to count Apple TV in their ests, but a marginally successful rollout could snag a slice of the $26bn mkt for DVDs and CDs. Deutsche Bank analyst Chris Whitmore says it is conceivable that Apple TV will cannibalize 20-30% of the existing DVD mkt within several years. It "opens substantial new mkt opportunities to Apple," he notes, and builds on Apple's stronghold in digital-content distribution. That's not the only compelling catalyst. Barron's sees a boost in Mac sales when "Boot Camp" gets delivered free this spring with Apple's new Leopard OS. Apple shares aren't cheap at 24x expected earnings, but the stock's P/E multiple has been higher before. And a premium is warranted for profits projected to grow by 20% annually in the next 5 years, presuming Apple continues to capitalize on this still-budding digital product cycle.

“International Trader” section highlights Nidec (NJ), whose stock is down 12% in last 12 mo’s. Blame the plunge in NAND flash-memory chips. At ¥7,830 last week, Nidec trades at 28x earnings, and sports a mkt cap of ¥1.13trln ($9.7bn). Nidec’s long-term growth rate, by Bloomberg's reckoning, is 52%. It isn't a cheap stock, and CEO Shigenobu Nagamori has said that the right mkt cap on his tgt of a trillion yen in sales is at least ¥2.5trln. Indubitably true is that those who bet against Nagamori over the long haul have been wrong.

“Technology Trader” column highlights positively CMGI (CMGI). Article was ran by Barron’s Online on March 21. See archives.

“Plugged In” column highlights Telanetix (TNXI). The co boasts a mkt value of only $58.5m, but it has proven that it can compete with its bigger rivals in the high-end video-conferencing mkt: Cisco (CSCO), H-P (HPQ) and Polycom (PLCM). In Jan, Telanetix beat its larger rivals by winning a major contract from Mercedes-Benz USA. The Telanetix system delivers full-size, face-to-face images in high res on large flat-panel screens, along with real-time audio and data. It really gives the perception that users are in the same room, says Bob Jesenik, of Aequitas Capital. "If they can make it CEO-proof, which we think they can, it could achieve mass-mkt growth," he comments. Jesenik says that Telanetix has been breaking even and could turn a profit this year. Sales could take off, he adds, given its announcement last week that it will lease systems to corporations for as little as $1,000 a month. Analyst Joe Noel of Dutton Associates, pegs ‘07 rev at $8.5m. He predicts annual earnings of 18c a share and rates the stock a Strong Buy, with tgt of 5. But even without a takeover offer, Jesenik contends that this small-cap could get big in a hurry. He says that mgmt has a proven track record with technology start-ups. In addition,
"the senior team doesn't take salary, which tells us that they are aligned with shareholders' interests."

Notablecalls: This one may fly but keep a tight leash as youre certainly not the first one on this train.

Friday, March 23, 2007

Calls of Note Part 4

- Prudential notes that The Senate Banking Committee, chaired by Christopher Dodd, held a hearing on Thursday regarding the subprime mortgage industry. Federal and state regulators, mortgage lenders, consumer advocates, lawyers and distressed borrowers testified at the hearing.

Firm's primary takeaway is that the credit quality of subprime mortgage is likely to continue deteriorating near term. Mortgage lenders at the hearing testified that they estimate that 40% to 60% of subprime mortgage borrowers would have failed to qualify if their mortgages were underwritten at fully-indexed interest rates, suggesting a widespread vulnerability to material rate resets. At the same time, the industry is still in the midst of implementing more restrictive regulatory guidelines on non-traditional mortgage, suggesting to Prudential that the availability of subprime credit could get curtailed further.

Firm believes that this hearing, similar to this committee's recent hearing on the credit card industry, reflects Congressional Democrats' twin themes of more visible assertion of oversight power and consumer protection. However, they are not sure whether there is any practical legislative solution to the perceived threat of higher subprime mortgage foreclosures beyond controversial "rescue" mortgages and regulatory dissuasion.

Notablecalls: 40% to 60% of of the subprime mortgage borrowers would have failed to qualify? Ouch!

Calls of Note Part 3

- FTN Midwest notes that on March 19 Barron's recently ran an article about Seagate (NYSE:STX) citing a note published by Prudential regarding STX's quarter end rebate program. Firm says they have differing opinions about how they interpreted the rebate program and their whole take on the current quarter implications for the HDD manufacturers.

Firm believes that the STX rebates are not a new development as they offered similar rebates in the last march quarter. Also, Toshiba and HGST are the most aggressive pricing wise in the channel at this point in time and STX will only be coming in line with the lower price points, not establishing them. Another thing to note is that according to firm's channel contacts, the majority of the drives covered under the rebate program are high capacity drives over 250 GB. This move from STX is more geared towards stimulating high capacity drive demand which has suffered tremendously due vista and other industry conditions rather than gaining market share.

Notablecalls: Not actionable but good to know category.

Color on Quarter: Palm (NASDAQ:PALM)

The Palm (NASDAQ:PALM) takeover saga continues as the company declined to comment the rumors on its quarterly conference call. Lots of comments about the results and takeover situation today.

- RBC says soft Q4 Guidance reflects higher 680 mix. Q4 guidance for $400-410M missed $416M conc, implying 0% Q/Q growth (vs. 6% Q3) reflecting expected higher (lower ASP) Treo 680 mix and ongoing PDA weakness. GM guidance for 36-36.5% was slightly down from Q3 and less egregious than expected. EPS outlook for $0.13-0.16 (inline with RBC) reflects ongoing cost containment, and appears conservative.

Firm says Palm appeared defiant, focused on turnaround, not takeout, increasing our conviction that no takeout is imminent. Palm affirmed pending Smartphone announcements (expected May, ahead of iPhone), aimed at recovering lost momentum. Turnaround remains possible -- but daunting hurdles remain.

Firm raises price tgt to $18 from $15.

- ThinkEquity says that although Palm's share price has reflected rife speculation on the takeover front, they think it prudent that investors focus on fundamentals. On this note, fiscal 3Q saw a return to revenue growth, gross margin expansion, record Treo unit sell-in and sell-through, and the revenue outlook (although lower than our model on whithering handheld units) points to improving Treo channel inventories. While one quarter does not a trend make, it appears we are seeing early signs of improved execution. Firm is raising their price target to $20. Maintain Accumulate rating.

- Merrill Lynch continues with their cautious view, noting that while Palm's Treo shipments grew 37% YoY in the Feb Q, the growth pales in comparison to the 90% YoY growth of RIM's Blackberry, by their estimates. Palm lost share despite 11% declines in average Treo selling prices versus only 3% drop in Blackberry selling prices, in the same period.

Palm's below-consensus May Q sales outlook of ~$405mn (~ down QoQ, flat YoY) and continued EBIT declines reflects the intensely competitive environment. Firm believes Palm benefited during the past quarter from a benign competitive environment at main carriers Verizon/Sprint. However, competition is likely to intensify when RIM launches its new Pearl/88xx at those carriers. The expected launch of Apple's iPhone at Cingular, featuring touch-screen features (similar to Palm's Treo), could also steal mindshare away from Palm.

Palm stock has appreciated ~31% in the past 2 months on speculation of a takeout. However, on the call management gave no indication of any imminent deal, which firm believes is likely to disappoint short-term oriented investors. Even if the deal were to materialize they do not expect any significant premium as Palm currently trades at a rich ~28x PE on firm's and consensus CY08 estimates. They are lowering FY08 est. by 20c to 61c and FY09 est. by 25c to 72c, on lower Treo ASP expectations, high opex, and faster declines in high-margin handhelds.

- Citigroup says that while the guidance is falling below existing estimates, overall they do not see the existing performance or future outlook in a negative light. Coming into the call, they had meaningful concerns about their near-term outlook, especially since they put themselves up for sale. Within this context the numbers were not that bad.

Having said that, they were surprised by management's decision to guide to flat to down operating expenses in 4Q. They argue that the lower spending is simply a timing issue. Given the ramp of competitive products expected to arrive in the market place (Q-derivatives, i-phone), firm would think that higher investment levels would be necessary. As was illustrated last year with the Moto-Q, competitive launches can cause short-term volatility in Palm's order shipments.

The company has made very little progress thus far in re-designing the Palm OS source code received from Access. This means it will be a while before they will be able to ramp up a WCDMA Palm OS product portfolio. Firm estimates that they are probably at least 1 to 1.5 years away from launching Palm 3G devices. With carriers allocating more 'shelf space' to 3G and less to GSM devices, this increases the risk level around their market share position. While the company can design Windows-based products with 3G, these products traditionally have been much volatile for Palm and more vulnerable to competitive pressure.

Notablecalls: The rumors of MOT-for-PALM still continued to circulate yesterday with chatters of deal already today. Sorry to dissapoint you guys and gals, still do not see it coming. Coming back to the reality, while the quarter was not bad, the guidance is not that nice. Given that we are getting nearer to expected iPhone launch I would expect consumers to postpone their purchase, thus hurting Palm's May qtr. However, while tempting, it is tough to short the shares today as most analysts seem to be rather positive and potential for more takeover chatter.

Color on Quarter: Jabil Circuiq (NYSE:JBL)

Several firms commenting Jabil Circuit (NYSE:JBL) after quarterly results.

- Citigroup notes that at first look Jabil's sales outlook appeared only a bit soft but additional analysis reveals that the outlook includes the company's recently acquired Taiwan Green Point which consensus did not include resulting in an organic outlook that indeed was lower than expected. While the company cites a host of issues (product, customer transitions, and exiting lower profitable business) investors will still interpret this as subdued demand and not the typical Jabil upside.

The biggest disappointment to investors is the company's head fake of a lack of operating profit turnaround. The company has been very vocal of operating margins to return to the 4-5% range in the next few quarters and this clearly is no longer in the case with an OPM outlook of 2.5-3.0% in May and 3.25-3.75% in August.

Firm sees no reason to buy Jabil as catalysts for operating turnaround are at least 3-6 months away, in their view, and with 50% of the Street with Buy ratings on the stock and EPS estimates significantly higher than ours, firm expects sentiment and estimates to shift lower.

As derivative Implications firm see additional risk to Solectron, Sanmina, and Celestica, which will implement the Cisco lean inventory management process during the next few quarters which has taken Jabil more effort to streamline.

- Jefferies says that although Jabil was unable to provide fiscal 2Q07 profit and margin data due to the ongoing option investigation, they believe profitability was well below their projections.

Just as Jabil resolves two (of the three) execution issues during the February quarter and the final issue is on the mend, Jabil's consumer business is now undergoing a reconfiguration due largely to pricing pressure, in their view. As such, Jabil expects a sequential decline in its consumer business in the May quarter (despite incremental revenue from a recent acquisition) and another decline in the August quarter.

- Cowen says they remain cautious on Jabil's shares near-term as the co is now transitioning two significant consumer customers (possibly Nokia & Philips) to different business models. This will hurt rev/margins for 3Q/4Q. Plus, Jabil said end market demand has been weak since December, but has now stabilized. With margins, May Q should be the trough, with improvement q/q for rest of CY07.

What's Wrong at Jabil? Good Q, tough to answer specifically. There has been options backdating, May 06 qrt with three operational issues (repair, ramping biz & component design), mostly now resolved. Nov 06 saw poor mix, an internally developed product write-off, and weak demand. Now Feb 07 qrt has big challenges hitting the consumer space. The Nokia cell phone biz will ramp down and new programs which incorporate vertical components (plastic/metal casings) will ramp up. Normal 'EMS' businesses with Philips will ramp down, as Jabil works to jointly develop and then build products (LCD TVs). All this hurting revs/margins near term. Firm's thoughts; 1. Jabil grew too fast in FY06, revs up 37% to $10.3B, and tried to do too many things with product design. 2. the consumer biz is very different than other areas of EMS. Very low margins, high turn inventory, all require a streamlined supply chain, with more vertical components in house, similar to the Hon Hai, Flex model. Jabil is working to adjust to this type of operation. Firm would look for visibility to emerge in August or Nov qrts.

- Bear Stearns taking their rating down to Peer Perform from Outperform as they no longer see compelling risk/reward. Firm says JBL is experiencing too many moving parts in its consumer business model which is driving near-term revenue deterioration as well as increased risk. Specifically, JBL is moving to a more product development-based relationship with PHG they believe, allowing it to perform more value-added R&D work and less commodity assembly. In addition, firm thinks JBL is moving the majority of its NOK business to a vertically integrated model which can also introduce new near-term risks. Firm believes JBL has the management team to execute on these challenges, however, they don't expect results for ~2 qtrs.

Notablecalls: Jabil has at least two more tough quarters ahead with both revenue and margins suffering. $23.5 level seems to act as a support for the shares N-T but I do not expect that level to hold given all the operational issues. Probably we are going to see lower share price no later than just after the opening bell rings today.

Calls of Note Part 2

Merrill Lynch is raising price tgt on MEMC Electronic Materials (NYSE:WFR) from $60 to $73 as a result of their higher 2008 estimates reflecting stronger polysilicon pricing.

Semiconductor wafer prices are also rising while volumes should increase after 1Q07. Given the sustainability of these trends, firm's price target only requires that the current 19x 2007 P/E is maintained as valuation shifts to their new 2008 estimates. This is conservative vs. their 21x sum of the parts peer valuation calculation.

Several poly suppliers have recently signed long term contracts with semiconductor and solar companies, and others are taking prepayments signaling a tight market for several more years. In the biggest move, REC, announced a 7-year agreement to supply poly to SUMCO, the 2nd largest semi wafer maker, with rising pricing through 2010! This shows that the tight poly market is increasingly impacting the semiconductor market and not just solar.

Falling solar costs from technology driving market growth Solar cell makers are finding ways to lower the cost per watt of electricity through technological advances which is spurring market demand and volume growth that keep poly supply tight.

Firm raised their operating EPS estimate (w/stock comp, 17% cash tax) for 2008 from $3.55 to $3.85 on stronger revenues of $2.32 billion (up 6% from $2.185 billion previously). Firm's estimates are slightly above consensus and reflect a higher contribution from solar, as their semi assumptions remain largely intact.

Notablecalls: Expect to see initial pop in the shares but wouldn't stay on board for too long after such a run over the past few days. Also, Merrill is just highlighting the same reasons that have been behind the run.

Calls of Note Part 1

Two tier-1 firms offering their views on Columbia Sportswear (NASDAQ:COLM) today.

- Merrill Lynch notes that as part of our Retailing Leaders Conference, they hosted an investor discussion with Columbia Sportswear's CFO Bryan Timm, VP of Sales Mick McCormick, and Director of Investor Relations David Kiser.

Firm notes the company has made significant changes in its footwear organization since the departure of former Vice President Brad Gebhard last October, overhauling the staff (including 100% of the senior merchandising team, the design leadership, as well as sales and distribution staff) and realigning production processes. Newly developed product will have a greater casual/lifestyle focus, with more year-round offerings (currently primarily cold weather products). The first line to incorporate these changes will be the spring '08 offering, which should post some good growth against slight declines in spring '07.

Firm sees moderate fall backlog growth, in the 6-8% range. They continue to see relatively moderate fall backlog growth, due to a warm winter in the US and Europe, and the likelihood that footwear orders will be down y/y. (While retail inventories in the US have now cleared given a much colder and wetter February, they got the sense that European outerwear inventories remain thick.) This represents a deceleration from last fall's 8.7% constant dollar organic backlog, which included low single digits growth in footwear orders (keep in mind that footwear SKUs will be down 33% for fall '07).

Management pointed out some key differentiators between the two brands. North Face is far more of a fashion brand than Columbia (which is more focused on authenticity and value) and has a very small sportswear business (39% of Columbia's sales, and up 18% this past fall). While North Face does provide markdown support to retailers (Columbia does not), management also pointed out that Columbia provides much higher initial mark-ups to retail customers.

Firm thinks investors will have one more big opportunity to buy COLM, after March results, assuming conservative backlog growth and guidance. They reiterate Buy and call COLM their best retail idea.

- Morgan Stanley says they're getting more cautious on COLM's order backlog. Recent sales data and discussions with retailers for COLM's outerwear business cast some doubt as to the quality of current order backlog levels -- a key stock driver. While market share in core Outerwear (50%+ of EBIT) is rising nicely yy, they're seeing 20%+ declines in avg price point suggesting that retailers are heavily discounting product to clear the shelf for spring merchandise. Not a shocker given the rough winter for the cold-weather apparel business, but never a good data point to see for an apparel brand.

Why This is Important: By firm's math, 65% of COLM's sales, and nearly 75% of annual cash flow comes from the fall selling season. Advance orders are being booked today, and reported by COLM next month w/1Q EPS. The North Face (owned by VFC) is not slowing down nor are smaller brands like Spyder and Marmot (owned by K2) that are gaining share. In addition, they're seeing new competitors like Merrill (owned by Wolverine Worldwide) get into the Outdoor space. Furthermore, there's an overinventoried US retail base that firm thinks is only holding margin steady due to vendor markdown support, and yet COLM is one of the few brands that does not offer such margin support. When all is said and done, they think that the outerwear space will be a share-grab for fall '07 (orders being placed now), and firm's concerned about COLM's relative positioning.

Notablecalls: Ouch! COLM shares are going to get hurt today. While Merrill seems to be positive at the first glance - best retail idea after all - they are also not expecting to see strong backlog that seems to be priced into the stock. And backlog is just about everything this stock is about. Actionable!!