Thursday, July 31, 2008

Scientific Games (NASDAQ:SGMS): Heads up from a hedgie

A smart hedgie just pinged me with the following:

Gruppo Lottomattica reported a little bit ago today, they had a a great number, its an Italian company. In the report they said Scientific Games (NASDAQ:SGMS) gained mkt share.

Not sure if anyone cares or if it means much but I bought some in here. I think if people realize it's a big deal.

Gruppo Lottomattica press release

Notablecalls: Hope it helps. - fyi

Wednesday, July 30, 2008

Elan (NYSE:ELN): After selling for the wrong reasons, now is the time to buy for the right ones- Leerink (ACTIONABLE!)

Leerink Swann out defending Elan (NYSE:ELN) saying they are making no changes to their valuation of ELN shares and view any weakness today as a buying opportunity.

The harsh sell off in the stock that could occur today will likely be fueled by overblown expectations for the Phase II data and the difficulty in presenting a cogent analysis of a complex trial in a complex disease in a 12-minute presentation.

MEDACorp consultant who was involved in the Phase II trial noted that data were reviewed over a two and a half hour period during an investigator's meeting night before last, speaking to the complexity of the data and the relative inability to distill it into an "elevator pitch."

To the firm, no new data emerged that causes us to revisit their thesis that bapineuzumab is effective, safe and worthy of advancing into large scale pivotal testing and could be a much-needed therapy for treating AD.

Lack of a clear dose response should not be overly surprising, especially in ApoE4 non-carriers, given that three of the four doses tested in the Phase II trial are being examined in the ongoing Phase III studies.

Although the safety profile may be understandably complex, the fact that the FDA has permitted a large Phase III trial suggest that the risk/benefit is favorable. Certain neurological anomalies may be acceptable in deference to mitigating quality of life-threatening dementia.

Lost on investors may be the fact that measures of efficacy reported from the Phase II trial that include ADAS-cog, NTB, CDR-sob, volumetric MRI and biomarkers such as phosphorylated tau are conducted by different medical professionals, e.g., psychiatrists, medical doctors, nurses, caregivers and radiologists thus enhancing the corroborative nature of the findings, they believe.

Notablecalls: Well, Leerink sure knows their stuff. I'm calling this one Actionable with ELN trading around $21 in pre mkt.

Please see below for further colour.

Elan (NYSE:ELN): Bounce?

Goldman Sachs is one of the few positive firms out on Elan (NYSE:ELN) this morning after the co presented Phase II Bapineuzumab data last night:

- Data clearly shows a statistically and clinically meaningful effect in APOE4 -ve patients, but with no clear dose-response due to low patient numbers. Data in APOE 4 +ve patients not as negative as previously assumed, but investors likely to stay cautious on this until proven otherwise.

As a result of the positive data, Elan will announce its manufacturing plans (a new plant) within the next two months; in our view, the capital commitment for a new plant, together with ongoing maintenance costs, as well as phase III costs, indicate the confidence in the likely outcome of the phase III programme. The magnitude of the cognitive benefits in small numbers of patients is hard to argue with, in firm's view; the effects on function less so.

Further, the data in patients who completed the full dose schedule in the study, in both APOE4 +ve and -ve patients, were clinically meaningful, as well as statistically significant. One of the aspects of the data that they believe investors have overlooked is that these results are IN ADDITION to existing Alzhemier's Disease therapies. In Goldman's view, that makes the data, albeit with its limitations, more compelling.


The stock may weaken acutely on concerns over dose response (genuine, in firm's view) and on the deaths in the Bapineuzumab arm (irrelevant, in their view), however, as the investment thesis has not changed, their recommendation remains Conviction Buy.

Other firms:

- Piper Jaffray reits Sell and lowers their tgt to $15 from $25

- Canaccord reits Sell and lowers tgt to $21 from $24

- Cowen & Co notes that with lower conviction in Phase III success for bapineuzumab and at least two years to wait for confirmation, they have trimmed their estimated bapineuzumab value by $4-5B, or $10 per ELN share, reflecting a higher discount rate. Firm remains Neutral on ELN shares.

Notablecalls: Developing Alzheimer's compounds has always been the graveyard shift. So, in that sense I'm somewhat surprised by the harsh 30% haircut in ELN's stock price following weaker than expected data. Actually, there may be a silver lining - the APOE 4 +ve pats. That's I think more than one would have normally expected from an Alzheimer's compound.

Add this to ELN's continued commitment for a new plant and you may have a nice bounce candidate here down 10 pts. I would not be surprised to see the stock retrace at least part of the 10pt haircut today.

Tuesday, July 29, 2008

Palm (NASDAQ:PALM): Very positive channel checks - JP Morgan

PALM: JP Morgan out very positive on PALM saying their channel checks at more than 20 Sprint and Best Buy Stores yield a consistent takeaway: there aren’t enough Treo 800Ws to meet demand. Firm is raising their F1Q09 estimates to above consensus. Reits Overweight.

Notablecalls: Rhymes with RBC Capital (see below).

Mechel (NYSE:MTL): Russian Vice PM: Mechel not another Yukos- Reuters

Mechel (NYSE:MTL), Russia's largest coking coal miner, is unlikely to suffer the same fate as YUKOS, Russian First Deputy Prime Minister Igor Shuvalov was quoted by Russian news agencies as saying on Tuesday.

"I consider this a most unlikely scenario. Under probability theory we can't exclude anything, but if I had the option, I would rule it out. The most likely scenario is that the company will co-operate with the state authorities," Shuvalov was quoted by Interfax as telling reporters.

Mechel's shares have tumbled in recent days after criticism from Prime Minister Vladimir Putin. YUKOS, once Russia's biggest oil company, was divided up and sold by the Russian state after massive back tax claims. Former YUKOS CEO Mikhail Khodorkovsky was jailed for tax evasion and fraud.

- Via Reuters

Notablecalls: I expect to see an upward move in MTL stock following these comments. I don't think Russia can afford a scandal similar to Yukos. That would represent a significant blow to outside financing.

I consider Putin's recent attack at MTL as a warning shot. One that will not end up damaging the co permanently. I see MTL trading towards the $22-$23 level as soon as today. The stock is flat lining in pre mkt and expect the action to pick up after the open.

Merrill Lynch (NYSE:MER): Positive feedback from analysts

Several firms comment on Merrill Lynch (NYSE:MER) after the co announced an $8.5 billion equity raise as well as a "substantial sale of U.S. ABS CDOs.

- Oppenheimer's Meredith Whitney notes this would reduce MER's CDOs exposure by $11.1 billion. While MER has significantly diluted existing shareholders, they applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise towards growth. While MER's stock still sells at a premium to book value and is expensive in firm's opinion, they believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company.

- Deutsche Bank notes the move increases shares outstanding by est. 38% and reduces est. run-rate EPS from $4/sh. to $2.80/sh but also eliminates most of the worst vintage CDOs, gets cash up front from monolines (vs. waiting 20-40 yrs.), and keeps book value around $22/share. DB is lowering their price target from $31 to $28 but keeping their Hold rating given an inexpensive valuation.

The good news is that the actual sales can give confidence that it is finally selling assets vs. merely marking them to market. Merrill is also getting ahead of others in getting money from monolines.

They apply a target multiple of 1.2x to their 2009E book value of $23.

- Goldman Sachs thinks it was undoubtedly a bitter pill to swallow, but they believe management's decision to finally sell the majority of its ABS CDO portfolio and write-off its monoline exposure was the right thing to do in order to move the firm forward. Nonetheless, these actions come at a very high cost to existing investors as outstanding shares increase by 38% under the "if converted" method (assuming no exercise of the over-allotment option). Although painful, the firm believes putting these issues largely behind it will better enable the firm to focus on existing business opportunities in the marketplace.

Merrill Lynch currently trades at 1.1x its pro forma if-converted book value of roughly $22. GSCO's new $28.50 six month price target assumes the stock will trade at 1.3x its pro forma if-converted book value in six months.

- Citigroup says that in their view the Merrill franchise has a tremendous amount of earnings power that can be unleashed over time through execution. While the real promise of the new management team at Merrill is the potential to unlock this earnings power, the legacy assets proved to be a year-long detour, but that is now behind us.

This is the first large-scale CDO transaction that is not a distressed sale. Industry participants will likely mark super-senior CDO assets with 2006 & 2007 vintage collateral down to the $0.22 range. Including the financing, Merrill took assets with a carrying value of $0.36 and wrote them down to $0.22, and transferred the risk of declines down to $0.17 to a 3rd party.

Reiterates Buy and $45 tgt (down from $65 due to dilution) as they expect the sale of highly illiquid mortgage related assets to be a catalyst to refocus on the earnings power of the Merrill
franchise. The overhang that has plagued MER for over a year has finally been removed. Furthermore, the capital raised enhances the quality of Merrill's equity base by significantly reducing the preferred component in exchange for straight common equity. MER is trading at 1.1x book despite the credibility of book value being materially higher post reducing the CDO exposure.

Notablecalls: So that's why MER was schmeissed over the past couple of days. I think the stock will see a bounce on this. Trading around book value and around 10x FY09 ests is where people will likely come in to buy the common.

It's all about survival these days and looks like MER has made it.

Only downside to the story can now come from earnings. Let's face it - we don't know what's MER's real earnings power is.

Monday, July 28, 2008

Palm (NASDAQ:PALM): Backlog may lead to a big upside revenue surprise above Street - RBC Capital

RBC Capital is out with a major call on Palm (NASDAQ:PALM) saying Palm's Q4/F08 Smartphone backlog (disclosed Friday in its 10-K) may lead to a Q1 (end Aug) upside revenue surprise above street estimates. Palm reports Q1 approx late Sept.

According to the firm, Palm's disclosed Q4 backlog is $238M, (vs. $185M Q4/F07, $121M Q4/ F06). Past precedents (Q1 Smartphone rev = 1.9x-1.6x Q4 backlog for past 2 years) suggest Palm's Q1/F09 Smartphone results may be $380M+ (1.6x Q4 backlog), or est. $413M+ total revenue, well above $324M street, with implied EPS at ($0.04) vs. ($0.18) street.

ST Trade Opportunity. Expectations of the upside revenue surprise (if true) may boost ST valuation, particularly given low valuation at 0.7x EV/S ($139M net debt) below peers at 2.0x, particularly following disappointing Q4 results.

Firm maintains Sector Perform rating saying that in their opinion, upside/downside scenarios remain, and Palm remains a "show me" story. They would become more bullish if new, unannounced products suggest improved competitive position; Palm delivered strengthening financial results and consistent execution, proving it can overcome its challenges. isibility to positive catalysts and recovering financial performance. They are maintaining their Q1 estimates pending completion of checks; will update in their Q1 preview.

Notablecalls: I expect to see a 10%+ move in PALM following this tid-bit. The expectations in PALM are so low that anything positive (a pos. rev surprise) will send shorts covering faster than you can say presto!

51 Job (NASDAQ:JOBS): Heads up on JOBS is erroneously reporting that Goldman Sachs has downgraded 51 Job (NASDAQ:JOBS) to Sell from Neutral.

The actual downgrade occured Friday morning. Think the good people at missed it.

Notablecalls: We may see some panic short covering after clients realize they have been shorting/selling on old info.

PS: I still greatly enjoy services.

Friday, July 25, 2008

Potash (NYSE:POT): Weakness Represents Excellent Buying Opportunity - RBC

RBC Capital is out very positive on Potash (NYSE:POT) noting that notwithstanding the potential for short-term share price volatility, they believe PotashCorp's current valuation represents an excellent buying opportunity for investors with a longer-term perspective. Strong earnings growth potential, a 2009E P/E multiple of 8.9x and 2009E free cash flow of $7.3 billion ($24.13/share) represent a few of PotashCorp's many attractive investment attributes. Based on its long-term growth potential and the implied all-in return to their price target, they view PotashCorp as extremely attractively valued.

Based on their supply and demand outlook, they generally expect fertilizer market conditions to remain robust through the medium term. With respect to concerns over the sustainability of high fertilizer prices, PotashCorp's management indicated during the Q2/08 conference call that they have not seen any signs of demand destruction under the current fertilizer pricing environment.

PotashCorp is currently trading at a 2009E EV/EBITDA multiple of only 5.4x. This is at the low-end of the historical trading range even though (1) interest rates are at historically low levels; (2) the company's future earnings outlook has never looked better; and (3) there are no obvious signs that the fertilizer industry is heading for a cyclical downturn anytime soon. Firm also believes the market is not assigning any value to PotashCorp's future potash expansion projects, which they estimate could add $90-$95 per share of incremental value.

Reits Outperform and $375 tgt.

Notablecalls: Can you say $200 POT?

First Solar (NASDAQ:FSLR): Encourage profit taking/shorting here - FBR

FBR is out with a negative call on First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) after Solar Electric Power Association (SEPA), an industry association bridging the solar and utility industries, announced yesterday theresults of its survey of utility companies (titled:"Utility Solar Electricity Market Survey"). Summary: (a) projected PV installations of ~2 GW, on aggregate, over the next three to five years in solar portfolio, versus >3 GW for CSPs across the U.S. utilities; (b) possible paradigm shift, with utilities owning the plants and PV suppliers becoming only turn-key provider (if ITC is given to utilities instead of third parties).

Firm notes that in their "best case" demand scenario analysis, for the excess capacity to be absorbed (thus helping with manufacturers' utilization rate of ~70%), U.S. mix of PV installations would need to increase from the current 4% to 15% by 2012, implying there would need to be > 5 GW of (aggregate) demand from the U.S. alone in that period. Assuming that the U.S. utility market accounts for a large mix of the overall U.S. market, the results of the survey suggest that
aggregate installation of 2 GW most likely won't be enough to absorb the kind of incremental capacity that will be available starting in CY09, unless PV module/system ASPs were to decline by >15% starting in CY09 to make them more competitive with alternatives like CSPs.

Stock Net: With firm's Underperform-rated stocks, FSLR/SPWR, pursuing large, utility projects in the U.S., they believe results of the SEPA study suggest that there is significant downside risk to current CY09/CY10 consensus estimates since the supply appears to be disconnected from the end-market demand environment, which requires much lower ASPs to make PV more competitive versus CSP.

They believe the relief rally has already come and gone, and they encourage profit taking/shorting.

Reits Underperform and $200 tgt on FSLR.

Notablecalls: I suspect this call will drive both FSLR and SPWR down today. We could see a 5%+ downside move in both stocks.

Thursday, July 24, 2008

MEMC Elec (NYSE:WFR): Upgraded at two tier-1 firms

Two tier-1 firms positive on MEMC Elec (NYSE:WFR) this morning:

- Citigroup notes that following through on their cautious call into the Q, they think this is finally the peak of the bad news w/the stock, at ~$40 aftermarket, now possessing a unique combination of attributes: inexpensive, and finally set up to beat and raise headed into late '08/early '09. While peers have tried to make this call for several Qs, they think three key things have changed that finally make this stock work going forward: 1) silane (an inherently difficult process to ramp and one in which very few companies around the world have deep expertise) is no longer the capacity bottleneck, 2) capacity to significantly beat
is in the ground, and 3) valuation leaves significant margin for error. Even assuming $50/kg for all solar pdct, they estimate downside to ~$35 against upside to $65 tgt (sum of parts). C09 largely unch'd, C10 from $5.63 to $6.14. Upgrades Hold to Buy and adds to Citi's Top Picks Live (TPL).

- JP Morgan upgrades WFR to Overweight from Neutral this morning.

Notablecalls: I suspect the stock will trade just below the $50 level today. There is some offered in pre mkt - I suggest you take it for a bounce.

Wednesday, July 23, 2008

Zimmer Holdings (NYSE:ZMH): Bounce?

Several firms are commenting on Zimmer Holdings (NYSE:ZMH) following the Orthopedic device maker lowered its 2008 profit and sales forecast and suspended U.S. sales of one of its hip products on Tuesday, sending its shares nearly 10 percent lower:

- Piper Jaffray is downgrading the stock to Neutral from Buy due to: 1) Concerns raised by their ortho survey and field checks, and 2) product- and DOJ-related issues facing the company. Firm notes they are big believers of orthopaedics, but there are several near-term issues making them more selective, and more cautious on ZMH, specifically. They would view any near term strength as an opportunity to rotate into other names in their universe with fewer near-term challenges.

The results of their survey of 50 orthopaedic surgeons and our anecdotal industry checks indicate that the post-DOJ orthopaedic market will benefit small- to mid-sized players at the expense of larger players like ZMH, at least for now. In addition, 32% of the respondents to the survey indicated that they noticed an increase in patients deferring surgery, and 64% expect to see deferrals increase over the next year. ZMH is the market leader and most affected by a slowdown in procedures – a scenario that the Street appears to have written off at the moment. Thus far, Q2 is showing a bounce-back from Q1, but the firm worries about unexpected share and volume trends over the next few quarters.

Firm's 12-month price target is $79, which is based on a 15x PE multiple on projected 2010 EPS of $5.29. The previous analyst's price target was $88, based on 18x CY09E EPS of $4.88.

- Cowen notes the quarter was actually decent, with revenue beating, and EPS hitting, consensus expectations -- the latter is notable given that most recent Street adjustments had a $0.01/share negative bias due to ongoing Durom concerns.

However, the pre-announcement was necessitated due to: 1) AMH's decision to temporarily voluntarily suspend marketing and distribution of Durom in the U.S.; 2) weakness in U.S. Dental revenues; and 3) slower- than-anticipated uptake on certain new products. Consequently, despite what was essentially an in line Q2 performance, management reduced their expectations for FY sales growth from 10.0-11.0% (6.0-7.0% excluding FX) to 8.5%-9.0% (4.5%-5.0%) and EPS was guided down from $4.20-4.25 to $4.05-4.10. The more pessimistic H2 outlook appears to go beyond Durom -- pending additional details on the conference call, we note that broader implications for the group are possible

Applying a 16x multiple to the low end revised FY08 guidance suggests shares are likely to open in the mid-$60s.

Maintains Neutral.

- Baird notes ZMH is temporarily halting U.S. Durom sales and lowering 2008 revenue/EPS guidance (guidance cut related to Durom issues, slow new product uptake, sluggish U.S. dental market). Estimates/price target under review pending today's call, but believe upward bias to firm's Street-low '09 projections exists given significant share repurchases and lack of worldwide Durom recall (which our model had assumed). Despite this, they would not recommend buying on weakness unless shares fall to low $60s.

Neutral, $74 tgt.

- Morgan Stanley is the most positive of the bunch noting Q2 sales and EPS were generally in-line with expectations and support firm's view that orthopaedic implant market fundamentals are intact, and market share remains sticky. A reduction in 2008 EPS guidance, however, will more than overshadow Q2 results. While they believe that investors had expected a cut in guidance due to Durom (and they had already lowered #s), the reduction was more significant than expected Assuming a similar cut to 2009 numbers and applying a trough one-year forward multiple puts the stock at $66.

Firm awaits clarity on several issues on the conference call (namely on SG&A spending and the
non-Durom cuts to guidance) to revise their model. On the Durom issues alone, the after market sell off appears to be an overreaction, and they think the key to the stock recovering will be confirmation that the Durom issues and slower ramp of new products will be transient.

Maintains Overweight and $85 tgt.

Notablecalls: I'm very much inclined to pick up some ZMH in the low $60's as:

- Durom is not being recalled but rather temporarily halted. The $40 mln product will likely return to US market in Q3. As I understand it, the problems w/ Durom are related to surgeons not knowing how to use the product rather than the product itself. ZMH will take a qtr or two to educate the docs.

- Problems around dental demand should not come as a surprise. Dental represents less than 10% of ZMH revenue and is tied closely to the consumer. Just take a look at what PDCO, HSIC and XRAY have been saying. No surprise there.

- ZMH is a high quality name being pushed down on transitional problems. Around low-to-mid $60's one has the opportunity to pick up a 15% net grower at around 15x this yr EPS & 13x CY09. That's cheap. Especially in med-tech.

Tuesday, July 22, 2008

Assured Guaranty (NYSE:AGO): Bounce @ $10?

Assured Guaranty (NYSE:AGO) is trading down 50% in pre mkt after the co announced Moody's decision to put its top rating on the company under review. Moody's Investors Service said on Monday it may cut its top ratings on Assured Guaranty due to concerns about securities it guarantees and raising questions over the future need for bond insurance.

"Although we view the commentary from Moody's as extremely vague, we feel the rating agency is taking an ultra-conservative stance given its sustained misjudegment of the larger and more troubled bond insurers over the last 12 months," JP Morgan analyst Andrew Wessel wrote in a note to clients. He lowered AGO to Neutral from Overweight and booted the stock out of firm's Focus List.

Wessel said he no longer believed the comopany will have significant insured production growth through 2009, and lowered his 2008 earnings estimate on the company to $2.00 a share from
$2.10. The rate cuts could be "the early stage of the end for the broader bond insurance market in its current form," he said.

- Deutsche Bank is lowering tgt to $13 from $31 and their '08E EPS to $1.75 from $2.10 and '09E EPS to $2.60 from $3.55 following Moody's actions. There could be upside to their target price and EPS estimates to the extent Assured Guaranty can salvage its rating, successfully operate as a double A insurer, or dividend capital in a run-off. They, however, maintain their Hold rating because uncertainty remains on the potential for large losses, future business prospects, and management's capital actions.

To the extent Assured Guaranty can quickly raise at least $1 billion of capital and start a new bond insurer focused on the municipal market, it may be able to continue writing new business and salvage the run-off value of the old insurance company. The rating volatility, however, may have irreparably damaged the value of bond insurance. If that is the case, Assured Guaranty may better suit its shareholders by accepting the downgrade and increasing its dividend, in firm's view.

Notablecalls: I suspect AGO may be a buy here around $10 as:

- Deutsche Bank notes Assured Guaranty had $120 million of capital in excess of the triple A requirement.

- Moody's is being very (extremely!) conservative here & may be lagging the cycle badly.

- Wilbur Ross is involved in AGO in a rather big way. If AGO does need more capital, Ross can probably arrange some swiftly to protect his stake. He has put in his own dinero and will not
go down without a fight. Plus, AGO has access to $750 mln of additional capital under the agreement.

This sell-off seems overdone.

Apple (NASDAQ:AAPL): Colour on quarter

Several firms are out with comments on Apple (NASDAQ:AAPL) following results out last night:

- Piper Jaffray maintains their Outperform and $250 tgt saying that while the focus today will be anxiety over gross margin, they expect by the end of the September quarter, the Street will likely look past margin guidance and focus on product transitions, along with the positive impact these products will have on revenue growth.

What is new is Apple guided to a 30% gross margin target for FY09, compared to PJ's previous estimate of 32.3%. Firm believes there are two reasons for this guidance. 1. Apple will slightly lower its pricing on existing products 2. Apple typically guides GM 270 basis points below the previous quarter's actual GM.

They believe Apple is readying new iPods and new portables that will apply downward margin pressure in the Sept. quarter and into FY09. We believe there is an 80% chance Apple will introduce redesigned MacBooks and possibly new MacBook Pros at lower price points. Specifically, Apple may re-enter the $999 price point (currently $1099)with the MacBook, or test the $1,799 price point with the MacBook Pro (currently $1999). In addition, PJ expects slightly redesigned iPods in the Sept. quarter, with lower-cost touch-based iPods for the holiday season. They believe Apple is getting slightly more aggressive with its pricing; but overall the company is not diverting from its strategy of premium pricing.

- Deutsche Bank notes AAPL beat expectations with revs of $7.5B & EPS of $1.19 (vs. DB at $7.4B & $1.06, Street at $7.4B & $1.08). However, concerns surrounding Steve Jobs' health and weak guidance (GMs of 31.5% in Sep Q and ~30% in FY09) overshadowed results and could likely pressure the stock in the NT. They expect AAPL to oscillate around current levels while investors digest current guidance and await improved visibility into new product refreshes (iPods and Macs) in C3Q. As a result, they lower their estimates and PT to $200 (from $235); maintain Buy.

Regarding Steve's health, mgmt said 'he has no plans to leave Apple and his health is a private matter'. While the topic is delicate, they believe the absence of a straightforward denial of health issues will increase speculation of a worst case scenario. Further, weak guidance (GM's of 31.5% for Sept Q) suggests softening end market demand with lower pricing required to drive share gains (iPods/Macs).

- Oppenheimer notes Apple reported respectable F3Q08 results--as if that mattered. The real news last night was Apple's forecast of a 350bps drop in gross margin in FY09.

Apple attributed the knee-capping to an upcoming product transition, the details of which remain shrouded in the typical cone of silence. So the obvious question is: what magnitude of product innovation (and revenue upside) would propel Apple to sacrifice so much profit?

Opco's guess: something big. While product details and the appropriate growth adjustments will emerge over time, we note that innovation has always been the key to Apple's growth and premium valuation. As such, they'd see a near-term pull back as an opportunity to re-enter Apple on a new ground floor. Reiterates Outperform rating.

- Morgan Stanley notes that while they believe last night’s move in AAPL shares presents an attractive valuation entry point (~$146 = 20x FY10 P/E, ex-cash, and just 0.7x earnings growth), they believe AAPL will remain in this range (and potentially trend lower) until we approach new product introductions in September.

Notablecalls: I'm not buying AAPL here around $150. I continue to suspect the iPhone will be a fad that will cannibalize the iPod opportunity (notice how iPod ASP's took another step lower). Mac's continue to be strong lending strong support to overall results. Yet, it looks like pricing there may be going lower too. That's rarely a good thing.

The matter regarding Steve Jobs' health continues to be a overhang as well. It is reported he is getting thinner and as we know cancer tends to return. Yesterday's conf call comments regarding his health did little to dispel these fears.

We may see a bounce early on but I suspect there is another 10-15 pts worth of downside risk in the stock here.

Yes, new products coming in Q3 may be interesting but what are the chances we will see a repeat of iPod/Mac or even iPhone. Kinda slim, no?

Monday, July 21, 2008

Biogen-Idec (NASDAQ:BIIB): Upgraded to Buy at Merrill Lynch

Merrill Lynch upgrades Biogen-Idec (NASDAQ:BIIB) to Buy from Underperform based on their assessment of the company’s earnings growth potential, an improved outlook in the multiple sclerosis (MS) market, and a diversified mid to late-stage pipeline. Applying an average biotech P/E of 19x 2009E EPS (implied PEG of 1.0) they believe BIIB is significantly undervalued given expected growth, driven by acceleration of Tysabri usage in MS and the recent launch in Crohn’s. Key near-term driversinclude better-than-expected Q2 earnings and a Tysabri/PML update, which they believe is likely to be favorable. Additionally, with a 9% price increase for Avonex and 3% for Tysabri at the end of Q2, we expect the company to raise guidance for FY 2008. Firm believes the Street has largely ignored BIIB’s fundamentals given the PML overhang and activist movements. These fundamentals continue to improve, making BIIB an attractive large-cap pick in H2 2008.

NDC sales data suggests that Tysabri sales are tracking above estimates, likely reflecting the recent Crohn’s disease launch (March) and increased clinician comfort with Tysabri usage in MS. Merrill expects Avonex sales at least in-line with expectations. Given the recent price increases for Avonex (9%) and Tysabri (3%), they anticipate continued revenue strength and upward guidance revision.

Biogen will provide a 2-year update for Tysabri either prior to the earnings call or on the call. Given the lack of negative press, the firm believes this update will be favorable, with a significant number of patients from the clinical trials exceeding 2- years of exposure. This is an important milestone, and a favorable report is likely to increase physician comfort with Tysabri usage.

Price tgt is upped to $79 frm $64.

Notablecalls: In light on Genentech's (DNA) buyout offer from Roche, I think this BIIB upgrade will have legs. I expect to see at least a 5% upside move in BIIB today.

Friday, July 18, 2008

Nucor's (NYSE:NUE): Correction overdone: we would aggressively buy the dip - Goldman Sachs

Goldman Sachs notes Nucor's (NYSE:NUE) stock price fell over 10% as it reported earnings that were ahead of expectations for 2Q but offered guidance that fell short of consensus expectations for 3Q. GSCO hase modestly lowered their 3Q and 4Q2008 EPS estimates to $1.95 and $1.90, from $2.17 and $1.92, respectively, mostly to reflect higher scrap costs and additional LIFO charges. Their new 2008 estimate comes down to $7.20 from $7.40, but they left unchanged 2009, 2010 and normalized estimates of $8.70, $9.85 and $8.85, respectively, which reflect volume growth and margin enhancement from valued added products.

GSCO thinks investors are over-reacting to fear of a weaker US economy and a potential global slowdown. Steel markets globally are in deficit, and there continues to be strong demand trends in BRIC and other developing nations that are straining global supply and more than offsetting demand weakness in US markets. And the weak US dollar is allowing increasing export growth for steelmakers at higher prices and margins. They see the steel cycle as very sustainable and look for continued strong earnings.

Following the correction, which theysee as unwarranted, NUE sells at a P/E of 8.3X 2008 estimate (a 7.7% discount to a peer group that has also corrected sharply). Reits BUy and $98 tgt.

Notablecalls: Think we'll see a nice bounce in NUE in the next couple of days. With oil getting somewhat cheaper and NUE being a user of it, things continue to look OK for NUE.

Thursday, July 17, 2008

Wells Fargo (NYSE:WFC): Expect the rally to fade

We have lots of negative comments on Wells Fargo (NYSE:WFC) this morning:

- UBS is downgrading their rating to Neutral from Buy following yesterday's run up.

- Citigroup notes that in a very volatile week, WFC shares are the best performer in their universe thus far, up 18% vs a 6% move for the bank index. It's hard to argue underlying results in 2Q were that much better than the market was expecting, so the large stock move seems to reflect the 10% increase in dividend and short covering.

Wells significantly added to its securities portfolio again in 2Q, and clearly is moving to a more
liability sensitive position. With increased credit costs, management seems to be increasing its carry trade to help fund its credit costs and maintain earnings. Citi ran their ALCO model, and found that if short term rates were to rise by 100 bp immediately, all other things equal it would be a 5% EPS headwind for WFC. Looked at another way, the increase in the securities portfolio since year end has added $0.03-0.04/share to the 2Q run rate.

- Deutsche Bank notes Wells Fargo's 2Q08 results were better than expected, incl. beating consensus by 3 cents despite $1.3 bil. in credit reserve builds (net). Yet, DB has lowered their '08 and '09 ests. by 5% each due to likely higher credit costs through 2009. They also nudged their price target to $30 reflecting the lower ests. They believe the stock price reflects risks and rewards opportunities and maintain Hold.

- FBR reiterates their Underperform rating on Wells Fargo, following its 2Q08 results, and reduces 12-month price target to $20 (from $23), equal to 2.0x 2Q08 tangible book.

WFC reported a better-than-expected 2Q08, but firm's outlook for the company is not materially changed, as they expect continued elevated credit costs and a smaller contribution from mortgage and trading activities in future periods. WFC is highly profitable and has strong capital ratios, but FBR is concerned that the company added leverage to its balance sheet (WFC added $9.6 billion of AFS securities and $13.6 billion of ST borrowings in 2Q08) and raised its dividend 10% in an environment where the more prudent step would be to conserve capital. While its regulatory capital levels grew, its tangible common equity ratio declined to 5.7% from 5.9% in 1Q08 and 6.6% in 2Q07. Capital levels remain healthy, but they would be more comfortable without growth in leverage or dividends.

WFC's allowance equals 1.88% of loans, which FBR considers under-reserved, as they expect annualized NCOs will exceed this level next quarter. Continued additions to its loan loss allowance will weigh on earnings.

- KBW notes that although WFC earnings came in above their expectations and the credit provision was appropriate for the environment, they are reducing their earnings expectations for the company because we believe that there are a number of unsustainable elements in Wells pre-provision earnings, which we discuss in this note, and that provision levels will remain elevated through 2009. They are reducing their 2008 EPS estimate to $1.75 (from $1.90) and 2009 EPS estimate to $1.80 (from $2.40). As a result of estimate reductions, they are reducing their one-year DCF based price target to $20 (from $22) and maintaining Underperform rating on shares of WFC based on valuation.

KBW says they are cautious on Wells largely because of our view of the economy slipping into a significant recession in the second half of the year, which they believe will impose considerably higher credit costs on WFC due to its geographic concentration (roughly 30% exposure to California).

Notablecalls: It's quite obvious WFC management wanted to give the shorts a run for their money. Successfully so, as the stock staged its biggest upside move in history ending up over 30%.

Is this sustaintable in any way? Nope, I don't think so. Very little has changed fundamentally.

I suspect WFC will retrace most of the gains as short covering (clobbering) subsides. I see it trading in the $23-$24 range in a week.

Research in Motion (NASDAQ:RIMM): Device shipments and activations are about 20-30% ahead of plan - Canaccord Adams

- Canaccord Adams is out with a huge call on Research in Motion (NASDAQ:RIMM) after they conducted our mid-quarter channel checks with leading global handset carriers and partners, including AT&T, Vodafone and Verizon. They did this to ascertain the fact and fiction of some recent comments made on Wall Street.

Canaccord believes that RIM's device shipments and activations are about 20-30% ahead of plan for June and July up to the 14th for all carriers. At AT&T, June came in at 20% above May, and July is tracking, based on data up to Monday, to be flat to up 5% in July at AT&T (yes, the iPhone carrier). Blackberry sales have seen no adverse impact from the recent iPhone 3G launch.

They are raising their Q2 revenue and EPS from US$2.62 billion/US$0.89 to US$2.67 billion/US$0.92. This is based on new Q2 shipments and net sub adds of 6.25 million and 2.7 million, respectively (previously 6.1 million and 2.6 million). Firm continues to believe that Bold will be launched in limited capacity in August, followed by major global releases in mid-September. They expect Kickstart, Javelin and Thunder in FQ4. Reiterates BUY rating and US$225 target.

RIM continues to be on Canaccords Best Ideas list.

Notablecalls: This is a pretty big call that should give the stock a significant boost. Kudos goes to Canaccord's Peter Misek for excellent channel checks.

Wednesday, July 16, 2008

Sprint (NYSE:S): Colour on recent SK Telecom chatter

On July 15, CNBC reported that SK Telecom is in talks with Sprint (NYSE:S) to acquire part or all of Sprint. The report added that no deal is imminent and no price has been set at this juncture. Meanwhile Reuters reported that SKT is in talks with Sprint on a technology alliance, rather than a takeover.

- Citigroup notes SKT remained silent on this news, but they view it is highly likely that SKT is looking for opportunities around Sprint to scale up its US presence. Combining Helio with Virgin still leaves it with a subscale US presence. Firm thinks SKT believes it has competitive
edge in technology to make a difference.

SKT's market cap of $15bn compares with Sprint's $25bn. Citi believes SKT would have to be part of a buyer consortium rather than going it alone. Assuming, say, a 20% stake in Sprintis acquired at current levels and SKT takes half, the required $2.5bn of investment would be more easily digestible.

- Goldman Sachs believes at ~$45 bn in enterprise value, and $25 bn market cap, the size of a potential outright acquisition of Sprint would be problematic given SK Telecom's smaller size ($15 bn market cap). This deal would require a sizeable cash component, an unlikely scenario in current capital market conditions.

SK Telecom partnered with Providence Equity and approached Sprint last November with a proposal for an equity infusion of $5 bn, and possibly more. Firm notes that the previous funding offer was made when Sprint stock was at ~$15, 70% above current levels.

Remains Neutral on the stock, and believes the risk/reward is not compelling. Firm's analysis leads them to a potential of breakup value of $12 Sprint for Sprint and an ~$5 value value for assets.

- Cowen is most positive of the bunch saying they expect Q2's results to show improvement and see upside to estimates. Moreover, SK Telecom's interest highlights strategic possibilities.

Firm believes churn dropped steadily in Q2. They project postpaid churn of 2.4% vs. Q1's 2.5%. They also believe the Instinct handset, plus the new ad campaign, boosted store traffic; they have seen that in our store visits. cowen projects postpaid net ad losses to slow to (1.0)MM from (1.1)MM in Q1, but also think the number could be (0.9)MM or lower.

Firm continues to view Sprint with 53MM subs and T- Mobile with 31MM subs as being at a scale disadvantage to VZ with 79MM subs (pro forma for Alltel) and AT&T with 71MM. With the WiMAX spin-off to Clearwire, Sprint appears to need a 4G migration strategy, which a partner could help.

Notablecalls: NCN Telco is convinced the deal will take place this year (pinged me last night). Some of his comments:

- SK Telecom has been aggressive with its international strategy. I think recently increased its stake in China Telecom

- Now that valuation is way down from $25 when the nextel merger announced, it makes total sense.

- Currency is relatively strong now. So looking at an acquisiton in the US is a good move. I think it will happen.

- Private equity firms are wiling to do deals with korean firms. SK is one of the top 4 firms in south korea.

- Just remember that South Korea has a very forward thinking /aggressive president in the office. He will even try to broker the deal if he believes it will bring more recognition and growth to korean economy.

Tuesday, July 15, 2008

Wachovia (NYSE:WB): A big tell

Wachovia (NYSE:WB) back in green. Well, almost back in green.

That's a pretty bold statement by the market.

Indicates we're getting close to the bottom.

Lehman (NYSE:LEH): Lehman's a buy here

I think Lehman (NYSE:LEH) is a buy around current levels with several points worth of upside.

- WSJ reports the U.S. Securities and Exchange Commission (SEC) has sent subpoenas to more than 50 hedge-fund advisers as it investigates whether individuals spread false rumours to manipulate shares in two Wall Street firms. The subpoenas, sent as recently as Monday, are seeking trading and communications data related to short-selling and options trading in Bear Stearns Cos or Lehman Brothers Holdings Inc (LEH), the person told the paper. Rumours have been blamed for the collapse of investment bank Bear Stearns and for the 40 percent slide in Lehman shares this month.

The subpoenas relate to trading in securities of the brokers, as well as correspondence between the hedge funds and other parties, people familiar with the inquiry told the paper.

- NY Post reports Lehman Brothers' CEO Dick Fuld is seriously mulling a way to take itself private and out of the public eye. According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm's solvency have caused shares to shed more than 79% this year. Details on how such a take-private maneuver might work are not clear. However, the rationale is that the free-fall in Lehman's shares is attracting hungry vultures hoping to snap up the ailing fixed-income shop on the cheap. "The idea is why sell to someone else at so cheap a price when they could buy themselves," noted one source.

Notablecalls: The actions taken by the SEC create a situation where the short sellers are forced out of the game. If they stick around pressing their bets & talking about it loudly (a.k.a spreading rumours) they risk getting caught. The good people at the SEC will show little mercy. So they are likely to fold and step aside. That takes the pressure off the stock.

Plus now we have Dick Fuld possibly looking to take Lehman private, representing a kind of a floor for the stock here around $13 per share.

Morgan Stanley was out positive on LEH yesterday reiterating their Overweight rating and $31 tgt calling it a high-beta play on possible recovery.

Looks to me like a good risk/reward trade.

Wachovia (NYSE:WB): Outlook is bleak for equity shareholders - Opco

Oppenheimer's Meredith Whitney is out downgrading Wachovia (NYSE:WB) to Underperform noting that as more news about WB comes out, they are increasingly convinced that the outlook is bleak for equity shareholders. WB has said that it's in the process of "enhancing the capital efficiency of the balance sheet" and "reducing mortgage exposure."

Firm estimates its mortgage portfolio will decline by 9% sequentially and total on-balance sheet loans will decline by at least 5% by year-end. The problem is the "denominator effect"; the loss numerator grows while the asset denominator declines, resulting in spiking loss ratios, lower assets, and lower net interest income, at least 50% of its earnings. In this very real scenario, expenses simply can not come down fast enough, seriously jeopardizing WB's ability to grow earnings.

Notablecalls: Looks like Meredith has given WB stock the proverbial kiss of death. I expect the stock to be down to the tune of -15& to -20% today (or possibly more). Anything above $8.50-$9 level is an Actionable Shorting opportunity this AM.

Monday, July 14, 2008

Marvell Tech (NASDAQ:MRVL): Colour on RIMM chatter - Avian

Avian Securities is out this morning reiterating their positive opinion on Marvell Tech (NASDAQ:MRVL) specifically putting into perspective some of the fears with regard to RIMM. Also they are once again outlining where they believe there is upside to their and street numbers, and why MRVL remains one of their favorite ideas.

Amtech is out indicating this morning that FSL has displaced MRVL in its 2.5G "Javelin" product due mid '09. While Avian is still trying to confirm whether MRVL won or lost this socket they would note that the Javelin product appears to be a lower end, lower cost, product aimed at less advanced networks. Losing such a socket to a lower end FSL product would not be as significant for MRVL which is focusing on higher end portion of the smart phone market and where MRVL is strongly entrenched within RIMM. In the next few months, RIMM has 3 updates scheduled kicking off with the "Bold", followed by "Thunder", and "Kickstart". They believe the Bold is positioned as RIMM's primary offering for enterprise users and expect 3G capabilities to expand RIMM's traction in Europe. Avian expects the touch screen Thunder (available in both CDMA and GSM versions) to target the high end consumer market with 3G capabilities again making this offering more attractive to European consumers than RIMM's previous portfolio. Finally, they see the Kickstart flip phone launching with an extremely attractive price point and targeting the lower end of the consumer market, previously an area where Marvell has not had significant traction. This diversification of RIMM's product portfolio should 1) create significant growth opportunities for Marvell at RIMM, 2) increase MRVL's ASP per part due to the ramp of 3G based products, while 3) mitigating the loss of any single design.

Thus, while Marvell may have lost the "Javelin" product, (note: speculation around potential design losses at RIMM has weighed on the name in varying degrees since they picked up coverage of Marvell in 2007 with the current speculation already having already helped cause nearly a 10% decline), the impact is far less significant than it might have been a year ago as RIMM's product portfolio has become far more segmented than it had been previously, particularly with Javelin likely appealing primarily to customers of carriers that have been slow to roll-out 3G capable networks (e.g. T-Mobile). Finally, with MRVL dominating RIMM's visible roadmap for 3G devices Avian believes that the company is well positioned to continue as a significant supplier to RIMM moving forward.

In the near-term, they continue to see a number of growth drivers beyond the new RIMM phones that should drive upside beyond the seasonal 2nd half pickup. These include Seagate's adoption of MRVL SOCs, MSFT's forthcoming Xbox update, ramp of new MRVL SSD controllers, and lastly increased traction for MRVL controllers in home server type solutions. In particular with regards to these NAS controllers, they believe this segment is becoming a meaningful portion of revenues for MRVL, and given the market growth rates (high double digit last year) will have a meaningful impact on our model as we shift to breaking out this product portfolio moving forward. Firm remains positive on MRVL given both the variety of upcoming catalysts as well as MRVL's attractive valuation (trading at approximately a 25% discount to growth on an earnings basis).

Notablecalls: Good coverage on MRVL by Avian Securities.

American Intl (NYSE:AIG): Do not think that the co definitely has to raise capital - FBR

FBR is out with a positive call on American Intl (NYSE:AIG) noting the shares fell almost 40% during 2Q08 alone, and they have lost 54% of their value since the beginning of the year. In firm's opinion, there is nothing wrong with AIG's core insurance operations. In fact, AIG is among the best poised in the P/C insurance industry to weather the soft market with its rock-bottom expense ratio and truly global presence. AIG's insurance investment portfolio and its credit default swap (CDS) portfolio, however, are two primary areas of concern for investors.

In the report, they examine the performance of several CDX indices over the past three quarters. Based on their findings, they believe that the change in the market value of AIG's multi-sector CDO CDS portfolio during 2Q08 was not significant, and they anticipate a modest gain of $500 million to $2 billion. Firm believes that AIG could incur losses in its investment portfolio for 2Q08 comparable to those the company suffered in 1Q08. While it is difficult to predict, they believe investment losses for 2Q08 could be around $7 billion after-tax.

With these potential unrealized losses, AIG has a very thin capital cushion left, but they do not think that the company definitely has to raise capital. FBR reiterates Outperform rating for investors with longer term horizons, but cautions that it will be difficult for the stock to perform until some stability returns in the financials sector. Until then, high stock volatility will remain.

FBR is lowering their 2008 estimate to $2.15 from $4.80 to account for less favorable credit default swap spreads. They are raising their 2009 estimate to $5.85 from $5.80 to reflect an updated share count.

FBR's tgt for AIG is $53.

Notablecalls: I suspect this call will create some nice buy interest in AIG today, especially in light of overall positive tone in financials. I feel AIG has been trampled ahead of the expected capital raise so that the actual news of a successful raise will actually buoy the stock.

AIG's a buy here. Could easily go to $24.50-$25 here. Today.

Friday, July 11, 2008

Fannie (NYSE:FNM) and Freddie (NYSE:FRE): Wild Week For GSE Shares, No Change in Fundamentals, Just Sentiment - Piper

Piper Jaffray is out with defending comments on Fannie (NYSE:FNM) and Freddie (NYSE:FRE) this morning noting GSE shares have gotten pummeled this week with FNM shares -30% and FRE -45%

Interestingly, there has not been one significant piece of macroeconomic or company specific news on either company to drive the decline, in firm's view. They believe FNM will likely not need new capital unless credit losses rise to over 40 bps, which would be about triple current levels.

The drop began on a bullish competitor's speculative note on capital and proposed FASB accounting changes (dispelled by the regulator). FNM/FRE's regulator, OFHEO, put out a press release last night saying "they are adequately capitalized with capital well in excess of OFHEO-directed requirements, have large liquidity portfolios, access to the debt market and over $1.5 trillion of unpledged assets." Piper doubts anyone will listen as fear is so high. They remain cautious with Neutral ratings on the GSEs due to concerns about credit. Firm notes that to upgrade, they need to get some confidence in the peak in credit losses, which they have not been able to do yet. Still, they have been surprised by the decline in FNM and FRE, as there has not been one significant piece of fundamental data to drive the decline.

The bigger decline for FRE is due to the fact that they have not raised capital (FNM recently completed a $7.4 billion financing), which they believe could make FRE capital ratios close to regulatory minimums by year end '08 unless they slow the growth of the portfolio

Firm is is lowering their price target from $30 to $15, which is based on 6x their '10 estimate of $2.50. This multiple is well below historical levels (12x is the 10yr median P/E multiple) due to the lack of visibility on peak credit losses.

They are lowering their price target on FRE from $28 to $9, which is based on 4x '10 estimate of $2.20.

Notablecalls: We have NYT reporting the U.S. government is considering taking over mortgage finance companies Fannie Mae and Freddie Mac if their funding problems worsen, in a plan that could leave shareholders nothing, citing people briefed on the matter.

These are pretty harsh statements that will likely send the shares down some more this morning. Yet, as Piper Jaffray notes, things are not as ugly as the media indicates.

Thursday, July 10, 2008

Wachovia (NYSE:WB): Buyable?

- Goldman Sachs notes the good news is that Wachovia has a new CEO. The bad news is that nearly half of the ~$8bn of capital raised in April has already evaporated. If they set aside the good news, the conclusion from the bad news is that more capital is required and the easiest and least expensive source has to be a cut to the dividend, which is still sizeable at $3.2bn annually.

While the stock may be up on the initial CEO announcement, the real outlook hinges on capital. This quarter's loss of $1.23 to $1.33 per share implies that WB will be cumulatively unprofitable since the credit crunch began. Given a lack of profitability and declining capital ratios, a dividend cut is likely while a broader capital plan may include asset/business sales. A goodwill write-down will also come to recognize that Golden West is impaired, but valuation and capital are both based on tangible book.

WB trades at 1.1X GSCO estimate of 2Q tangible book value. Firm's 12-mos DCF price target is $20. Maintains Neutral.

- RBC Capital believes Wachovia's stock will likely remain under pressure until credit quality stabilizes, the timing of which will likely take place in 2009. Under the leadership of its new CEO, they expect the company to incur a significant charge to "clean-up" its problems once and for all, eliminate its dividend and raise additional capital.

- Ladenburg thinks the hiring of Robert Steele will keep alive the belief that Goldman Sachs (GS) will acquire WB.

Firm's 12-month price target of $13 represents an estimated 75% of estimated tangible book value which is well above the 30% level the "Ground Zero" banks traded down to in late 1990-early 1991. Rating is unchanged at Sector Perform with Average Risk.

Notablecalls: I must say I have to take the opposite view here. I suspect Steele wanted some decks cleared before (write-offs) coming in. A guy coming from Goldman Sachs wants to keep looking good.

That makes WB buyable here just under $13

Wednesday, July 09, 2008

Focus Media (NASDAQ:FMCN): Goldman defends the stock following yesterday's sell-off

Goldman Sachs notes Focus' (NASDAQ:FMCN) stock traded down ~5% intra-day yesterday, which they attribute to concern that Focus' outdoor advertising business in Beijing is subject to a rule that only Olympics sponsors can advertise on the medium during August and September.

Speaking with management overnight, the company confirmed that its commercial network, poster frame, in-store, and online businesses are not subject to this rule, which only applies to a few of the TV screens in its Beijing travel and hotel network. The travel and hotel network is immaterial to revenue or earnings. The rest of the business sounds on track, and has enjoyed a full rebound from the post-earthquake deceleration. Focus will report its 2Q2008 results in the second week of August; GSCO expects the results to be supportive for its stock in terms of both earnings and cash flows.

Reits Buy and $58 tgt.

Notablecalls: Expect the stock to trade up on this. Could go to $27 in a jiffy.

Tuesday, July 08, 2008

Fannie (NYSE:FNM) and Freddie (NYSE:FRE): Defenses

Several firms are out defending Fannie (NYSE:FNM) and Freddie (NYSE:FRE):

- Piper Jaffray notes there has been much discussion over the past few weeks about the effects of the FASB vote to potentially remove a QSPE concept from FAS 140.

In plain English, the FASB is looking to add visibility to off-balance-sheet assets, especially in the face of huge charges and capital requirements resulting from off-balance sheet assets at some of the large banks such as Citigroup.

Based on a competitors' report outlining worst case results for FNM/FRE, on this topic, those stocks sold off by around 17% yesterday.

Piper had a discussion with a senior partner at a Big 4 accounting firm and with some industry senior executives that have been embroiled in conversations with FASB and regulators, and one thing is clear: they don't know the end result. However, with regard to the credit card assets and the GSEs, it sounds to us like they are not the target of the accounting changes. Despite that, for GAAP accounting purposes, they may have to add those assets to the balance sheet

Firm doubts, especially in the midst of a credit crunch, that regulators or Congress would allow a massive imminent increase in the capital required by those businesses. A worst-case scenario for the GSEs, taking an asset that requires 45 bps of capital and forcing an increase to 250 bps of capital, would be a massive cost increase for the mortgage industry driving large increases in interest rates to consumers. They doubt that is acceptable.

They remain very cautious on the most credit sensitive names and need to feel more comfortable about the outlook for credit to get more optimistic. However, the firm believes the reason for the sell-off yesterday was likely not justified.

- Keefe Bruyette notes that FNM and FRE have both suffered significant share price declines based on possible FASB interpretations for off-balance-sheet treatment of securitizations. The firm believes this sell-off is unwarranted on this issue as the GSE regulations already have capital requirements for off-balance-sheet exposures of the two companies.

Notablecalls: The media is approaching this issue in a way less aggressive way I expected this morning. With several defenses, I suspect we will see at least an early bounce in the names. My fave is FNM of the two. Give the shorts a run for their money.

Monday, July 07, 2008

WHERE is the Rally??

A good hedgie contact with an excellent track just pinged me with the following:

Hey.. wait a minute... I thought that when oil drops the market would rally?? Isn't that what CNBC tells us??.

Today I see

Oil down $5
NG down 60 cents
soft commodities limit down across the board ( I think)
dollar is behaving too.

My guess is that this is the final blow to the bulls... they stayed long hope.. that an oil/commodity drop would spark a rally.... and NOW WHAT?? Perhaps we see the last of them simply throw in the towel in coming days.

Here is another observation.........

We have FNM FRE collapsing and the market down only 100?? Could there be THAT much short interest in the market?? We may very well be pushing on a coiled spring here.... and if so... at some point we could have a massive reflex rally. I see that VIX is spiking at the same time we are approaching 1210 on the SP500.

Perhaps the simultaneous intersection of $30-VIX and 1210-SP500 could be the spark that sets it off.

I wish I knew the answer to these questions. Shorts are fat and happy.... and could be getting a bit careless.

Solar In Spain: Are Stocks Pricing In An Unlikely Worst-Case Scenario? - Cowen & Co

Cowen notes Solar stocks have been pummeled by concerns about a potential sharp drop in Spanish solar subsidies. In firm's view, a proposed 2009 cap of 300MW is unlikely to become law, as it would cause significant job losses and business closures. Unemployment and economic growth are the major issues for the Spanish government. The power sector has accumulated a large deficit, because regulated prices have not kept pace with fuel costs, underscoring the case for renewables.

They see Outperform-rated thin-film players ENER ($64) and FSLR ($253) as best-positioned, but believe Outperform-rated ESLR ($9), SPWR ($64) and STP ($35) are also oversold.

Modules are fungible across PV markets, so they believe that 2009 industry volume of about 9GW is achievable, but a smaller Spanish market implies lower ASPs (perhaps down 15% for c-Si players, vs. our prior 10% est.). ENER and FSLR have not seen ASPs skewed upward by Spain and have higher gross margin. Moreover, ENER benefits from higher roof and BIPV tariffs. SPWR and STP should benefit from a lower blended-cost silicon portfolio next year, while ESLR has no spot-poly exposure and should see margin expansion from the ramp of Quad-ribbon technology and the new Devens plant.

Notablecalls: I don't have great conviction in this one but we may see a slight bounce in the Solars in the n-t.

Thursday, July 03, 2008

Cleveland Cliffs (CLF): CLF should have rallied, not dropped 17% - JP Morgan

JP Morgan notes they believe the extreme sell-off in steel stocks today can be largely attributed to a Bloomberg story Tuesday – “ArcelorMittal Says Half of Customers Rejected $250 Surcharge” - quoting Lou Schorsch, head of MT’s Flat Carbon Americas. The market interpreted this information as the steel producers are unable to pass through higher raw material prices with higher steel prices.

It should also be noted that the $250/t raw material surcharge, or as MT likes to call it “cost recovery program,” was implemented for their fixed price contracts which represent less than 50% of shipments and not for MT’s spot market shipments. Firm views the program as a success by achieving a 50% success rate given this unprecedented move in altering fixed price contracts.

With steel stocks in their coverage universe off an average of 15% in the last two days, they view this as an opportunity to gain an attractive entry point in a group with strong fundamentals that should see record high earnings in both 2Q and 3Q. While they believe most steel stocks warrant a strong rebound, firm's top picks in the group are Cleveland Cliffs (CLF), Nucor (NUE) and US Steel (X). CLF dropped $19.93 or 17% today and now trades at only a 2009 PE of 7.5x and EBITDA multiple of 5.4x. Thermal coal represents only 2% of CLF sales, and they see numerous positive earnings catalysts both this year and next for the company.

For those who read beyond the title of the Bloomberg article, they should have noticed that Mr. Schorsch stated that their iron ore prices from CLF will be up 60% in 2008 (compared to JPM's 26% forecast). If this was true, CLF should have rallied, not dropped 17%. NUE is trading at a 2009 PE of 7.9x and EBITDA multiple of 4.3x, near the lows of its historical trading range and recently raised its earnings guidance.

Notablecalls: Note the call was initially issued yesterday afternoon as CLF was trading around $104. I continue to view CLF as the prime bounce candidate in the coal-steel space. See more colour below.

Cleveland-Cliffs (NYSE:CLF): Bounce time?

Several firms are out with defenses on Coal names following yesterday's sell-off:

- Citigroup notes coal has benefited from structural change, with historically isolated/fragmented regional markets linking up and "going global." Mine shortfalls, transport constraints, thin stockpiles, and voracious BRIC-country demand suggest that this process has several years yet to run.

Firm sees the recent 10 - 18% correction in the equities to be excessive, in response to a downtick in European spot from records. This seems profit-taking amid a deteriorating economy, and the "End of the beginning, not the beginning of the end." Met and PRB names should be insulated.

PRB coal is among the last large pools of cheap energy worldwide. They see it as 50 - 60% undervalued relative to C/N.App, while lags are typically 9 - 12 mos. Focus on test burns, exports, CTL/IGCC tech.

Citi is hiking forecasts across major US basins to levels in-line with survey data, with Met benchmarked to seaborne. The PRB is the only area where forecasts are materially above-market. As a result, they are upgrading BTU and ACI to Buy.

- Morgan Stanley says they remain constructive on US coal equities despite the extreme weakness yesterday. Firm believes the case for very strong 2009 domestic thermal coal contracts remains in place. There is potential for further coal price weakness in global and US coal markets following recent strong gains. They believe any further equity weakness in response to softer OTC prices presents an attractive opportunity to build positions, and in particular favorite Overweight–rated names, Alpha Natural Resources (ANR) and Peabody Energy (BTU).

US coal equities have declined sharply,likely in response to a sharp drop in European and US OTC thermal coal prices. MSCO believes the coal price correction represented some profit-taking following the sharp run-up, rather than a change in coal fundamentals. They do not believe the latest $25/ton run to approximately $150 in coal prices was fully priced into the stocks, nor do they think it should have been.

Yesterday's price action does not pose risk to estimates.

Notablecalls: Coal stocks are ready for a bounce this morning, I suspect. Apart from the usual suspects ACI & BTU my favourite of the bunch is Cleveland-Cliffs (NYSE:CLF) due to its exposure to metals. CLF was among the hardest hit yesterday and I feel it will trade back over $100 swiftly.

Deutsche Bank was only 3 days ago out with a call on CLF raising their tgt to $150 from $115. Suspect it is only a matter of time when they come to defend their stance on the name.

Wednesday, July 02, 2008

Sandisk (NASDAQ:SNDK): More colour from Amtech

Amtech on Sandisk (NASDAQ:SNDK) (Focus List BUY): SSD Adoption is Being Constrained by Cost/Benefit Equation. Based on our checks during the recent AmTech Asia Bus Tour, we believe that SSD demand and adoption rates are being temporarily delayed by price, performance and endurance issues, which could result in push-outs of volume ramps until 2010. The obvious headwind is SSD pricing preventing demand elasticity, including SLC and initial MLC-based solutions. Asia-based ODMs believe that pricing is preventing SSD adoption in their notebook platforms. We also think SSD performance is a significant factor holding back adoption as the throughput performance of SSD-based storage is not improving as expected, especially in high-end server systems. Volume adoption of notebook SSDs based on MLC NAND could be pushed out into 2010 as customer perceptions of high price and low performance needs to be addressed by suppliers. We believe the low endurance of inexpensive MLC SSDs is a new constraint that storage architects must accept and design solutions around and is not a permanent headwind to SSD demand elasticity.

Maintain BUY on SNDK rating and $40 price target.

Notablecalls: See below for more colour on SNDK.

Sandisk (NASDAQ:SNDK): Major positive call from ThinkPanmure

ThinkPanmure is out with a major call on Sandisk (NASDAQ:SNDK) noting the stock has been hurt by collapsing NAND pricing and build up of inventory at retail, OEMs, and the Taiwan module houses. However, NAND pricing could stabilize. Firm's checks indicate that Samsung is allocating 50M chips of 8Gb MLC to AAPL in July and August, which could substantially reduce Samsung's inventory and reduce some of the price pressure on NAND and inventory overhang in the market. In firm's view, while not a panacea for the inventory in the channel or at retail, it should stabilize NAND pricing. NAND spot pricing in the last two days has been trending up modestly.

While Bears have been calling for a renewed drop in NAND pricing, they believe the 50M chip order could remove a lot of NAND inventory and reduce a lot of inventory overhang from Samsung. Think believes it will also stabilize the NAND spot and contract pricing trends. If the pickup from the AAPL iphone, given what they view as an attractive $199 in the U.S. and free offers in some countries, is ahead of forecasts, it could drive more allocations from Samsung and help stabilize NAND pricing through the quarter

Reits Buy and $40 tgt

Notablecalls: SNDK will trade over $18 level today following this wonderful call by ThinkPanmure's Vijay Rakesh. Also note that Morgan Stanley is closing out their short SNDK idea this morning which is likely to contribute to buy interest.

Well done Vijay

PS: Digitimes talking about NAND this morning saying AAPL is back and spot pricing is going to start reflecting it.

General Motors (NYSE:GM): Downgraded to Underperform at Merril Lynch, tgt to $7

Merrill Lynch downgrades General Motors (NYSE:GM) to Underperform from Buy lowering their price objective significantly to $7, and lowering estimates to significant losses for 2008 and
2009. The key change in firm's outlook is a much lower forecast for U.S. auto sales that is driving a higher cash burn necessitating a much larger capital raise than the market is currently anticipating. Furthermore, they believe there is potential downside in the stock below $7 and that bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised. Although they believe GM has made strides in restructuring and has built a solid product pipeline, there are three recent factors that dwarf management’s best efforts.

Merrill now believes that much higher cash burn is likely to result in the need for a larger capital raise than anticipated, likely about $15bn (including revolver draws), which would materially dilute return of value to existing shareholders. They also believe the company has not recognized the stress in the capital markets. As time passes, the supply of capital for GM to bridge the gap to 2010 is becoming increasingly scarce, which is at least driving up the cost.

The recent drastic drop-off in sales, which is likely to continue through 2009, has been more severe than anyone anticipated.

The mix shift away from body-on-frame large SUVs that was generally expected over the next few years has been pulled forward to present day with the spike in gas prices and has been more extreme than expected. This has essentially rendered the large SUV segment obsolete, cutting into GM’s profit potential.

Notablecalls: Lots of unhappy buyers from yesterday. I suspect GM will trade below $11 as soon as today.

Tuesday, July 01, 2008

General Electric (NYSE:GE): Possible 2Q08 earnings upside trade - Merrill Lynch

Merrill Lynch reiterates their Buy rating on GE with PO $37.50.

Firm thinks GE will likely deliver 2Q08 EPS results in-line with the previous guidance of 53-55 cents – this event could present a positive upside trading catalyst for GE’s shares. They believe GE would have pre-announced an earnings shortfall rather than risk even greater investor backlash from reporting a miss the day of the earnings release. After 2Q08, earnings comparisons start to ease. GE has already materially lowered guidance for the full year and consensus expectations have declined substantially since mid-April. Firm believes the impact of higher loss provisions, lower securitization gains, and slower Real Estate markets are part of the company’s previous guidance.

Notablecalls: Ah, lovely. Just what we need this morning. GE's a buy here for sure. The co already lowered the bar and has traded down significantly from here. I'm betting the stock will surpass the $27 level in the s-t.

Calling it Actionable Trading Call

DeVry (NYSE:DV): Bounce?

Two tier-1 firms are out defending DeVry (NYSE:DV) following yesterday's sell-off:

- Merrill Lynch notes the hares of DeVry were down 12.4%, with the main news being that a 3.1mn block of shares was sold. The rest of the education sector traded down as well on no new news. The sale came as a surprise as DeVry only has four institutional holders that own 3mn shares or more. However, there wasn’t any fundamental news, and the firm believes the decline presents an opportunity for a high-quality name in the education sector. DeVry has also been added to the Russell 1000.

The next catalyst for DeVry will come when it reports 4Q08 (June) earnings on 8/14 after the close. MLCO forecasts diluted EPS of $0.33 in 4Q (+26% YoY) & $1.76 for the year (+86% YoY). Their 4Q forecast is $0.05 below consensus; firm believes the main difference is margin expectations as they expect spend on growth initiatives to ramp sequentially vs. 3Q. However, they believe this will drive future growth and forecast EPS of $2.21 in FY09 (+26% YoY).

Reits Buy and $69 tgt.

- Morgan Stanley notes there is no news coming from the company and they see no reason for the decline (apart from the 3.3 mln share block). While this is likely related to concerns regarding Apollo’s earnings, expected tomorrow after the close, they view Apollo’s problems as company specific and expect little impact on its peers, including DeVry. Firm maintains $62 price target and view the weakness as a compelling buying opportunity. Reits Overweight.

Notablecalls: I think DV represents a nice bounce candidate here. The shares were hit with the block sale & with this now out of the way (block was priced at $56 with the seller being MSCO itself, btw) it's ready to move back up again. My target for the bounce is $56.