Thursday, December 31, 2009

Happy New Year 2010

Notablecalls: Been a tough & interesting year. Expect nothing less from 2010.

Tuesday, December 29, 2009 (NASDAQ:AMZN): Data Points Indicate Strong December Quarter; Raising Estimates - Piper Jaffray

Piper Jaffray is out very positive on (NASDAQ:AMZN) raising their price target to $172 (prev. $163) ahead of December quarter.

Data points from Amazon indicating peak day orders increased 51% y/y and from ChannelAdvisor that its clients' December same-store sales on Amazon accelerated to +75% y/y lead Piper Jaffray to believe Amazon will report meaningful upside to the street's +33% y/y December quarter revenue growth estimate, which they believe will move the stock higher. Firm raises their December quarter revenue and GAAP EPS estimates to $9.3 billion (+35% y/y constant-currency) and $0.83 from $9.0 billion (+31% y/y) and $0.80 previously.

Amazon peak day orders increased 51% y/y to 9.5 million this holiday season, suggesting upside to the street's +33% y/y revenue growth estimate. Impressively, +51% y/y was the strongest y/y peak day order growth in 7 years of historical data and up from +17% y/y in 2008. In 2008, Amazon's peak day units increased 17% y/y while total December quarter sales increased 24% y/y (constant-currency) and in 2007, Amazon's peak day units increased 35% y/y while Dec. quarter sales increased 37% y/y (constant-currency).

Piper believes Amazon's retail eCommerce market share gains accelerated in the December quarter. ChannelAdvisor, an advisor to more than 3,000 online merchants, reported client same-store sales on the Amazon platform accelerated to +75% y/y in the month of December through the 20th, up from +70% y/y in Nov. and +61% y/y in October. PJCO's new +32% y/y Dec. quarter North American revenue growth estimate for Amazon would be ~2900 bps faster than overall eCommerce sales growth compared to comScore's +3% y/y for the quarter. Amazon has outpaced industry sales growth by 2100 bps on average each of the last 9 quarters and outpaced industry growth by 2600 bps in the Sept. quarter.

Operating Leverage Over Time. While choppy from quarter to quarter, over the long-run the firm believes Amazon can achieve near 10% PF operating margins. Their 2011E PF EPS would go to $4.67 with 8.0% PF op. margins from $4.31 (7.3%) currently.

Recent Operating Leverage. Amazon has low operating margins; the company's pro forma operating margins are in the mid-single digit range, averaging 6.5% of revenues through the first 9 months of 2009, up from 5.9% through the first 9 months of 2008. In Q3, Amazon's fulfillment expense (as a % of revenues) declined 80 bps y/y, mostly due to operating efficiencies from the opening of three new distribution facilities in the third quarter of 2008. They expect Amazon to continue to experience increased operating efficiencies from these warehouses in the near-term, which should translate to higher margins and profits.

Notablecalls: This is the new Street high price target for AMZN, surpassing the $170/sh target from Citigroup only a week ago. Piper is calling for a big Q4 (EPS 15% above consensus) and I think it's only matter of time when we see price targets in the $200's.

The S&P500 is pushing to new 52-week highs as I'm writing this which tells me AMZN may be today's weapon of choice to play the upside. My first target is $141, followed by $142+ if it can punch trough the 1st level with enough conviction.

Monday, December 28, 2009

Select calls: AAPL, NANO, ASEI

I´m going to give you a quick overview of today´s calls:

- Apple (NASDAQ:AAPL) is likely on the move today again as Thomas Weisel is raising their price target to $250 (from $245) on checks that are pointing to above-expectations iPhone & iMac sales. Broadpoint.Amtech is raising their price target to $260 noting their iPhone sales estimates are 30% above consensus for Dec 09.

Notablecalls: The stock is just begging for a reason to move higher. Wants new highs. Wants $212+ today.

- Nanometrics (NASDAQ:NANO) price target is raised to $17 (from $13) at Piper Jaffray this morning as they believe that there is upside to their estimates as more chip makers increase spending and NANO introduces a new overlay tool. Moreover, the firm believes that it is in leading chip makers' best interests to broaden their supplier bases and NANO is a prime beneficiary of this effort.

Notablecalls: NANO seems to be one the sexiest Semi Equipment names out there. I suspect the bump from PJCO will create enough buy intrest to propel the shares to $12+ today. I would not rule out $12.50 level today if the market plays ball.

- American Science & Engineering (NASDAQ:ASEI) will be on the move today for sure as Stifel noted that on December 24, the U.S. Army posted a notice indicating that it intends to negotiate solely (as prescribed in FAR 6.302-1, which states policies and procedures, and identifies the statutory authorities, for contracting without providing for full and open competition) with AS&E to provide thirty-seven Z-Backscatter Military Trailers (ZBMTs) to meet' requirements in Afghanistan. The notice was not a request for competitive proposals as AS&E is considered to be the only source for the equipment. Stifel thinks the order is worth more than $1 million per unit.

Unfortunately, recent events have shown that acts of terror are still being attempted and that, globally, current passenger screening procedures are inadequate to stop such threats. On Christmas day, a passenger on an international flight inbound to a destination in the United States attempted to detonate an explosive device. The components of the device made it past the typical walk-through metal detector and x-ray parcel screener. Stifel thinks (along with many air travel security experts quoted over the weekend) that whole-body imagers and reduced size CT x-ray automated explosive detection systems could provide the solution. AS&E's SmartCheck and Analogic's eXaminer SX are among a handful of products that are capable of detecting the materials that were carried aboard and assembled during the flight. Orders for competitors' equipment are currently being filled, but the firm thinks the recent attempt could accelerate purchases of the equipment. AS&E (ASEI - $71.70) is rated Buy and Analogic (ALOG - $36.20) is rated Hold. They think both stocks are likely to rise today.

Notablecalls: A $40-50mln contract and a juicy terrorist scare in just one weekend. All of a sudden homeland security is hot hot hot again. I think ASEI can trade up 3+ pts on this.

No clue on ALOG. Too thin.

Wednesday, December 23, 2009

Sandisk (NASDAQ:SNDK): Upgraded to Buy at ThinkEquity; $35 price target established

ThinkEquity is making an interesting move on Sandisk (NASDAQ:SNDK) this morning upgrading the flash data player to a Buy from Hold with a $35 price target.

Firm raises their FY10E EPS to $2.04. They believe SNDK is positioned for a solid 2010 with multiple tailwinds including: 1) Better-than-seasonal NAND pricing trends in a weak build season globally, 2) Leaner channel inventory, 3) Major OEMs Samsung, Hynix, Toshiba currently running at 100% utilization, 4) No new fabs slated for 2010 and supply coming mostly from technology shrinks. Firm believes that given supply constraints, NAND pricing could rebound earlier than expected in 1Q10 as new product cycles from Apple and handsets take hold.

ThinkEquity upgrades SNDK to Buy given robust trends in the NAND flash space. NAND pricing trends, down only 10%, have been better than seasonal pricing trends of down 10-20% and portend a strong 2010, in their opinion.

1) Their checks indicate NAND channel inventory continues to be lean as some of the NAND flash card inventory has been depleted early in the quarter. Firm believes that low-density flash cards are seeing good sell through into China.

2) Also, despite a weaker global demand, NAND OEMs Samsung, Hynix, Toshiba, and Micron are running at close to 100% utilization. We believe that both the lean inventory above and the peak NAND OEM utilization validate the stable pricing trends.

While they had been cautious on potential softer NAND pricing trends as consumer builds peak, they believe that current Spot trends point to a healthy supply chain and low inventory. ThinkEquity believes that the better-than-seasonal NAND pricing is a good lead indicator to potentially-stronger 1Q10 NAND pricing. They believe 1Q10 NAND pricing could rebound faster on limited NAND supply and new product cycles such as 1) a 64GB Apple Tablet (1M Tablet Equiv. to 4M iPhones), 2) Multiple tablet offerings from Dell, Acer, Asustek, andMSI, 3) iPhone builds, and 4) a Channel rebuild combined with the Chinese Lunar New Year, which could drive NAND demand in excess of 100% bitdemand Y/Y.

Firm thinks NAND pricing could trend up for most of 2010, given NAND demand growing potentially 100% Y/Y, supply constraints with OEMs currently running at full utilization and potential bit growth next year of 60-80% mostly with die shrinks from 4x to 3x nm, incremental wafer starts, and no new Fab adds.

They are raise their 2010E revenue/EPS estimates from $3.96B/$0.40 to $4.63B/$2.04, versus the consensus of $4B/$1.32 with a per-share market value of $35 from $21, 17x 2010E EPS and 2.5x tangible book value of $14.

Notablecalls: I must say, this is one gutsy upgrade from ThinkEquity's Vijay Rakesh. He is basically calling for un up-cycle in pricing & demand not seen since 2006. Take a look at what Morgan Stanley had to say about NAND pricing on Dec 16 when they issued a negative Research Tactical Idea on the name:

'...We believe the share price will fall relative to the industry over the next 60 days.
SNDK stock has outperformed the broader semiconductor group by ~ 2:1 in the last two weeks due to uptick in NAND memory spot pricing, making short-term valuation less compelling, in our view. We expect NAND contract pricing to decline in the near-term on seasonal demand weakness, which will likely cause shares to fall, as stock shows a strong correlation of 90% to NAND component pricing. We have two reasons to believe that NAND pricing will decline: 1) NAND component cost as a percentage of Smartphone (e.g. iPhone) bill of materials (BOM) has peaked at ~27%, which we believe will drive OEM's to demand lower pricing and 2) our data shows that SNDK's US channel inventory units are now above 08' peak levels, which could force lower pricing if US retail demand is slower than expected.

We estimate that there is about a 60% to 70% or "likely" probability for the scenario...'

Over the past couple of months we have had several tier-1 firms slap their Sell/Underweight ratings on the stock as they were anticipating a fall-off in NAND demand & pricing. It kind of looks like it hasn't happened and the stock has become a short-crusher.

It's up 7+ pts in the last 5 weeks and I'm kind of questioning the call out of ThinkEquity. Sure, it's gutsy & will make good for at least a 1pt move. But can you really buy SNDK here on hopes of selling it around $35?

Didn't think so.

Good mo-mo call, though. Especially with Micron (MU) blowing away the estimates.

Tuesday, December 22, 2009

Potash (NYSE:POT): BPC Reaches Agreement on 2010 Chinese Potash Contract Price Per Industry Sources - RBC Capital

RBC Capital is out with a pretty significant call on Potash (NYSE:POT) saying industry trade publications (i.e., Fertilizer Week and FMB) are reporting that the Belarusian Potash Company (BPC) and Chinese buyers have reached an agreement regarding the 2010 Chinese potash contract.

Pricing Could Be Close to Low Case Scenario. It is understood that the price under the yet-to-be signed agreement is $350/tonne CFR (i.e., ~$320/tonne FOB Vancouver or ~$290/tonne FOB Saskatchewan) for 1 million tonnes of product. This price is approximately $70/tonne lower than the contract price implied in RBC's 2010 financial forecasts. The reported price is closer to the "Ugly" scenario than the "Not So Bad" scenario outlined in their October 21, 2009 PotashCorp Morning Comment.

Maintaining Estimates. Firm is maintaining their financial forecasts pending further review. While BPC may have reached an agreement, it is not clear yet whether Canpotex has reached a similar agreement with the Chinese buyers.

Near-term Downside Pressure on Potash Producers' Share Prices. In light of the reported contract price, the firm believes valuations for global potash producers could face some near-term downside pressure. While the pricing may be lower than market expectations, they believe the contract will establish a floor price for the potash market and thus provide certainty for investors going forward, which is positive.

Recommendation. Given the potential for a market over-reaction, RBC recommends investors look for potential buying opportunities in the event of significant share price weakness based on their outlook for an eventual rebound in potash pricing.

Notablecalls: $290/tonne FOB Saskatchewan is below market expectations. I've been pouring over the Chinese contract price expectations over the last couple of weeks and I think the expectation were in the $350-$400/tonne range (FOB Sask).

For example, yesterday CIBC was out noting there was speculation that the Chinese MOP contract could be settled shortly and we believe pricing will be settled in the ~US$375-US$400/t CFR range (previously they had assumed a price of US$400+/t CFR).

In terms of trading dynamics Goldman Sachs put POT in their Conviction Buy list yesterday in hopes of solid pricing (above $300/tonne). RBC's comments will create selling pressure from these players.

I think POT will trade towards the $105 level today and maybe even lower if the $105 level breaks with volume.

As one of my best trading buds noted this morning: 'if it breaks $105, say hello to par'

Also watch MOS, IPI on this.

Monday, December 21, 2009

Potash (NYSE:POT): Added to Goldman Sachs Conviciton Buy list; Short squeeze?

Goldman Sachs is adding Potash (NYSE:POT) to Conviction Buy list with $140 target retained. They are also upgrading shares of Mosaic (NYSE:MOS) to Buy (from Neutral) as they take advantage of a sharp sell off in the fertilizer space last week to get more bullish. Their view of a fundamental demand recovery in potash in 2010 remains unchanged, and they believe a near-worst-case scenario on 2010 potash pricing is now discounted in stocks. Goldman sees a very compelling risk/reward setup and encourage investors to buy shares of both POT and MOS before the market regains its confidence in the fertilizer outlook in 2010 and beyond.

What the market missed
Goldman believes that confusion and uncertainty dominated trading this past week and note that the market entirely ignored bullish comments from the same sources that drove the negative sentiment. The rumored $300/mt FOB Baltic China contract price is actually inline with the expected outcome range, albeit at the lower end, when adjusting for the appropriate freight costs. They believe much of the market misunderstood this data point as a delivered price to China. Other industry comments suggested an 80% increase in potash exports and rising 2H10 prices in Brazil.

With expectations lowered, they believe the conclusion of a China contract settlement will be a positive catalyst for both the global potash markets and potash-exposed stocks. The contract could be signed by year end, and theywould expect an early January settlement if it carries over into the New Year. Once signed, the firm believes other global importers will begin taking shipments to secure their 2010 potash needs. Given lean distribution system inventories, an increase in shipments will help clear producer inventory substantially more quickly than in the past.

Best buy ideas
POT is Goldman's favorite Buy based on the 2010 potash theme, but they also like MOS, which has significant phosphate exposure—a nutrient that, confirmed by very recent channel checks, has been strengthening. For MOS, they raise our 12-month, price target to $68 (from $64) based on 16X (from 15X) P/E forward EPS to be more aligned with peer valuations. They make no estimate changes, and note that they are slightly below 2011 consensus EPS in POT, but believe stocks will move ahead of revisions.

Notablecalls: POT is down over 12 pts over the last couple of trading days. I'm being told Cramer was all negative on the name on Friday (saying weakness would continue on Monday) which sets the name up for a short squeeze - POT style!

I'd like to see a slight pullback toward the $108 level before the name takes the shorties for a ride.

I'm not making a conviction call here but I think that's how it's going down this morning.

Just a heads up.

Btw, GSCO coverage on POT has been just terrible. Terrible!

Alcoa (NYSE:AA): Upgrade to Overweight at Morgan Stanley; 50% upside to target

Morgan Stanley is upgrading Alcoa (NYSE:AA) to Overweight from Equal-Weight with a $22 price target (representing 50% upside from current levels).

The stock is trading at ~10x Morgan Stanley's estimate of earnings at spot ($1.00 per lb) aluminum, before factoring in improvements that they expect in alumina and downstream businesses. Firm has increased their earnings estimates by 50% for 2010 and 20% in 2011 to factor in better profitability in alumina and downstream; however, they continue to use their commodity team’s aluminum price of $0.84/lb in 2010 and $0.88/lb in 2011.

Drivers of the Upgrade

Driver 1: Potential increase in alumina pricing.

Morgan Stanley expects Alcoa to benefit from an increase in the alumina price relative to aluminum (the linkage rate). Alcoa’s realized linkage rates could exceed the 2006–08 average of 13% and stay above 15%, in line with recent market transactions. YTD 2009 average linkage has been above 15%, albeit at depressed base aluminum prices. AA’s cost competitiveness should improve with Juruti/Sao Luis ramp-up. The growth of smelting capacity in the bauxite-deficient regions could lead to tightness in this market and provide additional upside. Alumina accounts for ~45% of aluminum costs in China and ~35% world ex-China. They think Alcoa will more actively seek pricing power than in the past. Firm estimates the normalized earnings potential of Alcoa’s Bauxite & Alumina segment at $725 million at $46 ATOI/T.

Driver 2: Downstream better positioned.

They think Alcoa can earn more than the cost of capital in downstream segments. During the current downturn, Engineered Solutions quarterly ATOI bottomed at $65 million and Flat-Rolled was near breakeven, ex Russia/China losses. Restructuring of these segments in recent years, including sale of several underperforming businesses, will help increase earnings power through the cycle. Improvement in volumes in key end-markets, such as can sheet, aerospace and power generation, will help margins. Firm estimates the normalized earnings power of Flat-Rolled Products segment at $500 mn and Engineered Solutions at $600 mn at 9% and 12.8% RoA, respectively.

Some risk presented by a USD rebound. MSCO's FX strategists expect the USD to rally versus major currencies as rate and growth differentials shift in favor of the US. However, they expect EM growth to outpace G10 growth, and the USD to underperform EM currencies. This could result in some initial weakness, but the prospect of favorable EM and US growth, combined with aluminum’s still-tight link to the cost curve, leaves them relatively constructive.

Notablecalls: Well, this is the upgrade many have been waiting for in light of the Alumina price rally. The stock looks set to break out to new 52-week highs and as we are getting closer to year end, I don't really see anything standing in the way.

I suspect Alcoa will set up to be the perfect mark-up play.

Today, the stock will trade over the $15 level for sure with $15.10-15.25 my first targets for the name. I think that if the market plays ball we can see Alcoa up 6-8%, putting $15.45+ levels in play.

Let's see how it works out.

Friday, December 18, 2009

Dana Holding (NYSE:DAN): Upgrade to Overweight, price target to $16 - J.P. Morgan

J.P. Morgan is upgrading Dana Holding (NYSE:DAN) to Overweight from Neutral while raising their price target to $16 (prev. $7).

According to the firm their more positive view reflects: 1) improved earnings visibility— DAN has finally provided formal EBITDA guidance (for 2010), which seems conservative but, more importantly, the fact that it was precisely in line with their prior 2010 forecast inspires more confidence in the predictive-ness of their earnings walk through 2012 for this multi-end market company); 2) strategic repositioning improves medium-term revenue visibility (Structural Products unit sale materially reduces DAN’s exposure to US light trucks); and 3) recently fortified balance sheet, which notably reduces balance sheet / covenant risk overhang (e.g., common stock offering, Structural Products sale proceeds), allowing investors to instead turn attention to 4) improving end markets. JPM's new estimates assume a US SAAR and Class 8 build of 12MM/140k in 2010, 13MM/182k in 2011, and 14MM/200k in 2012.

DAN introduced FY10 EBITDA guidance of $500MM, consistent with JPM/consensus. 2010 revenue guidance of +5-10% they found conservative (as management seemed to not aggressively contest on the call); such guidance implies $5.5-5.7B off JPM 2009e revenue base (vs. JPM $6.0B).

Estimates. JPM raises their 2010 group EBITDA from $500MM to $535MM (guidance $500MM), implying an 8.9% EBITDA margin.

Sale of Structural Products division to Metalsa further strategically focuses DAN as a leading supplier of driveline components: DAN recently announced the sale of its Structural Products division (primarily frames for light trucks) to Metalsa for up to $150MM, implying it was sold for a relatively modest 2.6x 2010E EBITDA, but future capex rise avoidance seems to have been a big motivator. Proceeds will be earmarked for debt reduction (term loan at par).

Unlike ARM, sale of Structural Products likely does not suggest desire to transform into a wholly commercial vehicle supplier. JPM notes they sense DAN regards Driveline as core and does so across both light and commercial vehicle categories. Earlier this year when the value investors ascribed to automotive firms reached a record low, DAN announced it would no longer look to actively shop its Sealing, Thermal, and Structural Products divisions (Metalsa reportedly approached DAN in this case). On the call Thursday, mgmt. stressed the integral nature of LV Driveline. Mgmt. noted some recent electric car related wins for the thermal business, and this may be a new growth opportunity, but they still think Sealing/Thermal could be sold if/when M&A multiples improve.

Stock View: JPM values DAN shares at 4.5x EV/EBITDA on newly introduced 2012e JPM EBITDA of $800MM. They had previously utilized a 4.0x multiple on 2010e but believe recent actions to de-risk the business (e.g., strengthening the balance sheet through ~$260MM equity offering and sale of Structural Products for ~$135-150MM) justify taking their valuation out to a longer time horizon and modestly higher multiple (though 4.5x is still below 5.0-5.5x they would generally use for many suppliers, reflecting some market share concerns). In addition, the firm is attracted to the stock given conservative 2010 guidance and the fact that the NA CV market rebound which, unlike the LV market, still appears a few quarters away from starting, could be multi-year in nature (another reason why they look out to 2012 for valuation purposes).

Notablecalls: So now the positive comments start pouring in. Barclays was the early bird in the name upgrading the stock in the low single digits in July and raising their price target to $12 couple of weeks ago in anticipation of good guidance (see archives). Now J.P. Morgan comes out and slaps another Street high target on the name.

This sets the stock up for another s-t pop today. I think DAN will trade over the $10 level (as it did yesterday in reaction to guidance) & will possibly challenge the highs once more. So $10.10-10.20+ is my target level.

After that we are likely to see some profit taking in the name as some market participants are sitting on huge gains & will probably want to lock in some. Over the coming months there will likely be a shift in the shareholder base as new investors come in as other analysts turn more positive on the name.

Thursday, December 17, 2009 (NASDAQ:AMZN): Citigroup raises target to $170; Estimates above consensus

Citigroup is lending a helping hand to (NASDAQ:AMZN) this morning raising their price target to $170 from $140 and reiterating their Buy rating.

Firm notes that at a high level, they have long considered Amazon a core Internet franchise because it screens very well against their four long-term factors: 1) Management strength – AMZN has consistently and successfully obsessed with innovation & customer experience; 2) Competitive moats – it’s increasingly hard to imagine someone taking share from Amazon in its core businesses, although they do focus on the potential negative impact of developments like the launch of Apple’s “tablet” on Amazon’s Kindle offering; 3) Significant long-term growth opportunity – Citi's Double-Double thesis – over the next ten years, Online share of Retail Sales (currently 7%) could double while Amazon’s share of Online Retail Sales (currently 10%) could also double; and 4) Inherently attractive business model – margin expansion (AMZN – check) and significant conversion of EPS into FCF (AMZN – check).

Four Key Near-Term Updates – 1) eCommerce Channel Checks suggest accelerating Online Retail and AMZN market share gains – 73% Y/Y holiday SSS growth on AMZN’s platform, per ChannelAdvisor; 2) comScore Traffic Analysis shows accelerating AMZN Website trends – 19% Y/Y visitor growth in Oct. & Nov. vs. 18% Y/Y in Q2 and 9% Y/Y in Q2; 3) Quarterly eShopping Cart analysis continues to highlight AMZN Selection Superiority and Competitive Pricing Position; and 4) NPD Video Game Console & Software QTD Sales Trends indicate Less Worse – though clearly still weak (down 24% Y/Y/down 8% Y/Y) – trends.

Raising Estimates Above Consensus — Raising Q4 GAAP EPS by $0.08 (13%) to $0.72 & ‘10 GAAP EPS by $0.40 (16%) to $2.92:

One Long-Term Update: Greater Than Expected Kindle Traction – Based on a series of datapoints & analyses, the firm has increased their Kindle estimates again. Specifically, they believe Amazon will sell approx 2MM Kindles in ‘09 (up from Citi's prior est. of 1.5MM) and Amazon may well generate $1.6B in total Kindle device and book sales by 2010, approximately 5% of its total revenue. The Kindle has definitively established itself as the “iPod of the Book World.”

Addressing Valuation Concerns – AMZN’s valuation remains intrinsically very high, BUT: a) AMZN’s average forward Non-GAAP P/E since ‘07 has been 36X, and AMZN’s current Fundamental & Market Share inflection point arguably supports an above historical average multiple; (Interestingly, while AMZN’s stock is up almost 70% since mid- April, its forward multiple has actually gone down…AMZN has actually gotten less expensive…because EPS estimates have increased so materially.) b) Citi's 3-year EPS CAGR of approx. 30% arguably supports a premium valuation; c) AMZN has consistently maintained one of the Internet & Retail Sectors’ highest conversion of EPS into FCF (195% from ’07-’09), which again argues for a premium valuation based on EPS Quality.

Notablecalls: So, we have a new Street high price target for Amazon. With the stock down almost 20 pts from its yearly high and looking very vulnerable on chart basis I suspect the shorts are in for another merry-go-round.

Also, take a look at the estimate bumps - it seems Citi has raised 2010/11 estimates way ahead of consensus.

This is bound to draw attention.

The futures are in deep red this morning, which makes buying AMZN a bit tricky but as I have noted several times before the stock seems to be a sleeper in the pre-market only to take off after the open. We may see similar action today as well.

I think the shorts have gotten a bit too comfy in the name (again!) and will be punished for it.

If they get AMZN going today the stock can hit $131+ level easy, I suspect.

Wednesday, December 16, 2009

Renesola (NYSE:SOL): New Kid on the Block, Upgrade to Overweight - Morgan Stanley (Actionable Alert!)

Morgan Stanley is out with a fairly major upgrade on Renesola (NYSE:SOL) upgrading the Chinese Solar name to Overweight from Equal-Weight raising their price target to $6.60 (prev. $2.30).

Analyst notes their upgrade reflects their view that ReneSola will target the profitable module business in FY10 with a low priced strategy to gain significant market share. Having cleared most of the high cost polysilicon inventory, the core wafer business will likely also become profitable. Although the negatives are fading away and the company is migrating into profitable new segments, the stock is still trading below its BVPS, which makes it compelling, in Morgan's view.

They believe that ReneSola is one of the new kids on the block to target the attractive module market. With the acquisition of JC Solar earlier this year, the company is well placed, in their view. It is expanding in high margin solar module business to displace high cost EU module makers and limit the share gains of integrated cell-module makers such as Yingli, Trina and Suntech. With a pricing spread of $1.1/Wp between modules and wafers and incremental manufacturing cost of $0.60/Wp and limited capex, there is ample margin (and profit to be gained. It could ship 150MW to 250MW of modules in FY10 adding an incremental $50m+ to gross profit.

Due to its low market cap and high inventory drag for almost a year, ReneSola has been unloved and has underperformed its peers. It is now one of the cheapest solar stocks globally, trading at 11.0x earnings and 0.9x book on our 2010 estimates. With a new business model with reasonable margin recovery, we believe ReneSola is ready to enjoy higher profitability and well poised to gain market share and potentially surprise on the upside.

Likely Catalysts
Morgan Stanley expect ReneSola’s stock price to be driven by four key catalysts:

1. Strong growth in 1H’10: They expect ReneSola’s total shipment to grow from 322MW in 2H’09 to 378MW in 1H’10, which is much better than the industry growth and peer group growth. Furthermore, share of modules (higher profitability) will grow significantly from Q1’10 onwards, in their view.

2. Slowdown in ASP Declines: Morgan Stanley expect ASP declines to slow for the entire industry, resulting in a positive revenue inflection.

3. Digestion of high cost inventory: For the past one year, ReneSola has incurred a significantly higher than market cost of polysilicon. However, most of this high cost polysilicon inventory has been digested now and they believe this should result in a margin recovery from Q1’10 onwards.

4. Cost Reduction (1H’10): In Q4’09, ReneSola should be able to deliver non-Si manufacturing costs of US$0.37/Wp (incl. depreciation), down from US$0.39/Wp in the previous quarter, in firm's view. Management is targeting a further reduction in non-Si cost. If it were to reduce the non-Si cost to US$0.33/Wp by mid 2010, it could make a significant positive impact on the company’s gross margin.

What could it be worth in three years?
Morgan Stanley believes that if ReneSola executes well on its module strategy it could be worth US$11-12 in three years time. Based on 27% shipment growth for the three years beyond FY10, they estimate that ReneSola may be able to generate net profit of $80m+ based on a net margin of 6.3%, which likely translates to EPS of US$0.90. With a slowdown in prospective earnings growth to 18%, they would expect the market to accord a P/E of 13-14x to the stock, implying a stock price of US$11.7 to 12.6 per share. Firm expects its BVPS to grow to US$7.4 per share. By that time, with normalized ROE at 12%, they would expect the market to accord a P/BV of 1.5x, which would imply a stock price of US$11.1 per share.

Notablecalls: All systems 'GO' on Renesola (SOL) - this one is cleared for takeoff. Actionable Call Alert!


- I trust you have seen the action in some of the Chinese Solar names lately. They are flying.

- Renesola (SOL) has been a notable laggard in the space and with a blessing from a firm the size and reputation of Morgan Stanley it can't get much better.

- I'm sure many of you Solar watchers saw the positive comments on Ja Solar (JASO) from Morgan Stanley's Solar team on Monday. Look at what the stock did afterward. It went from ~4.50 to around 6.00 in two days. This was of course helped by the guidance raise on Monday evening but that was what Morgan Stanley was calling for. They now have a lot of credibility in the space.

Renesola (SOL) is among the smaller names in the space which should amplify the expected move in the name today and over the coming days. A forgotten name brought back to life. That's the way we like it.

This one will trade up 10-15% today putting $5.00-5.30 levels in play.

Tuesday, December 15, 2009

Qwest Communications (NYSE:Q): A Strong Contender for 2010; Upgrade to Buy - UBS

UBS is upgrading Qwest Communications (NYSE:Q) to Buy from Neutral with a $5.50 price target (prev. $3.80).

UBS believes Qwest is well-positioned to outperform the market in 2010. They believe fundamentals in the business and wholesale markets are likely to improve in 2010 after less than stellar results in 2009. These revenues make up 64% of Qwest’s topline and have caused investors to largely disregard the exceptionally strong free cash flow generated by the company.

They believe improvement in revenue trends will cause the Street to refocus on the cash, which they expect to remain strong through 2011. When fundamentals are deteriorating, highly levered companies typically see the most pain. However, given their outlook for improvement the firm believes the most upside will come from levered companies such as Qwest. Additionally, continued debt paydown in 2010 should be accretive to equity holders if the company is able to maintain its attractive 4.6x 2011 EBITDA multiple. Based on UBS FCF estimates, this alone would drive 15% upside from the current price.

UBS has increased their 2010 revenue estimate slightly to $11.7B from $11.6B, reflecting a 4.9% decline in 2010E vs. a 8.6% decline expected in 2009E. They now believe that 2010 EBITDA will decline by 3.9% to $4.20B (prev. $4.06B), reflecting a 35.8% margin (prev. 34.9%). They have also slightly lowered their 2010E capex to $1.64B (prev. $1.69B), equating to 14% capex as a percentage of sales. This coupled with their revised EBITDA number helps lift firm's 2010 FCF estimate to $1.55B (prev. $1.43B). UBS now estimates 2010 EPS of $0.31 (prev. $0.29) and 2011 EPS of $0.38 (prev. $0.29).

Balance sheet under control – may even provide source of upside. Qwest will continue to restructure its balance sheet throughout 2010 and the company has stated that it plans to refinance regulated debt and pay off unregulated debt. Applying UBS ex-dividend 2010 FCF estimate of $1B to net debt reduces their 2011 EV/EBITDA multiple to 4.3x from 4.6x. Looking at it another way, if the company maintains its 4.6x multiple, the lower debt level would lead to ~60 cents of equity accretion, or 15% upside from the current price.

Unemployment data points to upside in business market Non-farm payroll losses have improved dramatically since peaking at 741K jobs lost in January 2009. Payroll losses for the month of November came in at just 11K vs. the 111K lost in October and 139K in September. UBS believes the non-farm payroll reading coupled with recent optimistic comments from several of the companies they cover confirms that business revenue is in the early stages of recovery. With roughly 41% of its total revenue exposed to business, Qwest will be a prime

Qwest as a takeout candidate? Aside from UBS' belief in the sustainability of Qwest’s cash flow, its improving revenue trends and attractive valuation, they believe the final leg to the story comes in the form of M&A. Despite its much larger size, they believe Qwest could become a takeover candidate for one of the RLECs (CenturyLink or Windstream) looking to gain scale.

Notablecalls: I think UBS has created an interesting situation with their upgrade this morning. I'm sure you have seen the action in some of the single-digit telco plays like Sprint (S). There have been some surprisingly big moves.

When it comes to Qwest (Q) the overall analyst sentiment has been neutral-to-negative (lots of Hold/Sell ratings). With UBS blessing the stock with a Buy and a nice $5.50 price target we may see some buy interest in the name today.

For reference check out the stock's reaction to J.P. Morgan's upgrade on May 26. The stock gapped up 5% ($0.20) and ended up 8-9% for the day. I suspect we may see something similar today.

I'm guessing the stock will trade up to $4.30-4.35 range today.

Monday, December 14, 2009

Teradyne (NYSE:TER): Well Positioned for the Upturn; Upgrading to Overweight - Piper Jaffray

We have couple of firms out rather positive on Teradyne (NYSE:TER):

- Piper Jaffray is upgrading TER to Overweight from Neutral while raising their price target to $13.50 (prev. $11.50).

Positioned to outperform the group. Piper believes that during the downturn Teradyne has significantly expanded its market opportunity. They believe that this will enable TER to significantly outperform the semiconductor equipment group. Firm estimates that TER has increased its SAM by 40% - 50% since the beginning of 2008. TER acquired NexTest in January 2008, entering the flash memory and low-speed DRAM markets. The company also entered the DRAM market with an internally developed tester targeted at the DDR3 market. Memory test was about a $1.7 billion market in 2007 and bottomed at $300 million in 2007. They expect memory test to see a strong recovery in 2010 to $600 million. TER purchased Eagle Test, expanding its footprint in the analog and discrete test markets by $300 to $400 million. The analog test market is about a $100M market in 2009 and should also grow to ~$200M next year. Finally, the company entered the Hard Disk Drive system test market. The company expects to see $30 - $50 million in HDD test revenue in 2010 with an addressable market of $150 to $200 million. Piper believes the company is working on adding Seagate as a customer.

Reduced cost structure will drive strong earnings growth during upturn. While TER has significantly expanded its addressable market, the company has also reduced its operating expenses. Piper thinks this combination will drive strong earnings growth as the recover unfolds over the next couple of years. As a result of the company's cost reductions, its target model of 15% profitability can now be achieved on $275 million quarterly revenue, down from $345 million.

Adjusting rating to reflect their conviction on the name. Piper notes they have been looking for an opportunity to upgrade TER since the company's strong Q3 report. Unfortunately, they missed much of the pull back in the shares. While they have missed some of the near term move, they believe that TER is one of the best positioned mid cap semiconductor companies for the current upturn. They are adjusting their rating to reflect that belief.

Introducing 2011 estimates. Piper is are raising their CY10 numbers slightly on slightly higher gross margin assumptions and introducing their CY11 estimates.

- Barclays is reiterating their Overweight rating on TER and raising their price target to $13 (prev. $12).

Firm believes 4Q09 is on track supported by strength in SOC including EGLT and a pickup in memory, offsetting lower HDD. Overall, they model revs of $265M (guide $255-270M, cons $266M) and EPS of $0.17 (cons $0.16) with risk to upside.

Barclays expects roughly flattish orders at ~$290M suggesting BTB of 1.1 and ending backlog of $360+M, the highest level in 8 quarters.

But the real near-term key to story is that SOC/memory strength should cont and enable flat to better revs despite a falloff in HDD in the Mar Q. Their checks suggest EGLT will grow in 1Q followed by cont'd strength in memory (read NAND) and core SOC. We now model revs of $275M (cons $266M) and led by improved mix, they see GMs increasing Q/Q by ~150bps, driving new EPS est of $0.18 (cons $0.10).

Est Changes - CY10 $1.18B/$0.85 (cons $1.13B/ $0.58) and CY11 to $1.3B/$1.10 ( $1.28B/$1.07).

Notablecalls: Piper's price target is the new Street high (albeit by a hair). Some of the more sexier Semi Equipment names likes Varian Semi (VSEA) broke to new 52-week highs last week which should add some fuel to TER's fire as well.

Texas Instruments (TXN), Teradyne's largest analog test customer indicated last week they were seeing strong demand. That bodes well for Teradyne's Q4 numbers.

I think TER will trade $10+ today with $10.25-10.50 range not out of the question. I suspect this one is headed to new 52-week highs.

Friday, December 11, 2009

NCR Corp. (NYSE:NCR): Sizing It Up: Going to Overweight - J.P. Morgan

J.P. Morgan is upgrading NCR Corp. (NYSE:NCR) to Overweight from Neutral with a $15 price target (prev. $16).

Assuming near zero growth in core ATM and retail businesses in 2010, the firm believes NCR can still eke out 5% revenue growth owing largely to ramping Blockbuster Express operations. They also believe the pension funding gap is likely to narrow slowly from here. There's still a ton of execution risk in this story, and company guidance has been poor recently, but the firm thinks risks are priced into the stock. ´

Core business remains weak. End market conditions have not changed since the 3Q conference call; retail is still very weak, but stable; financial services is stable and improving slowly. As ATM manufacturing ramps in Brazil and Georgia, NCR believes its competitive positioning is improving, though it could take 6-9 months for operations to mature, meaning associated margins will not improve until 2H10. JPM still believes there’s risk that the rate of deployment of deposit-automation will slow in the U.S. in mid 2010 as national banks conclude their aggressive rollouts.

They are forecasting near zero sales growth for NCR’s core retail and ATM businesses through 2013, leaving room for positive developments, including reaccelerating ATM deployments in Eastern Europe, share gains in Brazil, adoption of cash recycling solutions in China, broader adoption of deposit automation in the U.S., and a retail recovery.

5% growth in 2010 largely from the DVD initiative. JPM believes the DVD Kiosk initiative 2011 can generate $250mm of revenue. The acquisition of DVDPlayer accelerates NCR’s plan to deploy 10,000 Blockbuster Express kiosks by mid 2010. Based on our first-cut forecasts for this entertainment segment, they believe the business can be cash flow positive in 1Q11

NCR has deployed 1,600 Blockbuster branded DVD kiosks so far and is on track to deploy 2,500 by year-end, with another 1,300 coming from the DVDPlayer acquisition (Safeway deployments on the West Coast). The company’s plans call for 10,000 units to be deployed by mid 2010. Recent commentary suggests that the typical kiosk, costing $12.500, is generating $40,000 of annualized revenue within 6- 9 months of initial deployment and is cash flow positive by that time. Assuming that 10,000 kiosks are deployed by mid 2010, the firm estimates that the business could contribute ~$300mm in revenue in 2010 and achieve cash flowbreakeven in 2H10, which is ahead of current expectations.

JPM is upgrading NCR to Overweight from Neutral. They believe NCR is attractively valued, even taking into consideration significant execution and end market risks, and will therefore outperform the mean of their coverage. The stock is trading at a near 50% discount to its peers on the basis of the 2010E EV/EBITDA multiple. JPM's December 2010 price target goes to $15.00, based on an assigned multiple of 15 times CY11E PF EPS (ex Pension funding), to which they add back $5.60 gross of pension obligation funding short-fall. NCR has $2.50 net cash per share, and they believe the Kiosk business might be valued at $1.00-1.50 per share, so the core business is currently valued at ~$950 million, or about 0.2 times 2010E sales.

Notablecalls: This is not a monster call from JPM. While they are upgrading NCR to an Overweight, they are actually lowering their estimates and price target. Yet, with the stock down 4pts (-30%) from its current highs JPM's blessing will likely be welcomed with relatively strong buy interest.

The DVD Kiosk business at least sounds sexy and will add the much needed growth driver. Also, while not mentioned in the note, NCR has previously been highlighted as a potential takeout candidate. United Tech (UTX) CEO said on investor conf. yesterday they have earmarked $2-3bln for takeovers in 2010. NCR surely fits the bill.

I think NCR will trade in the 10.25-10.50+ range today and possibly higher in the coming weeks.

Thursday, December 10, 2009

Dick's Sporting Goods (NYSE:DKS): See upside to 4Q09 comp; Upgrade to Buy -Merrill Lynch/BofA

Merrill Lynch/BofA is upgrading Dick's Sporting Goods (NYSE:DKS) to Buy from Neutral with a $28 price target (prev. $23).

According to the firm DKS’ 4Q09 comp plan of (4)-(6)% could be exceeded due to better than expected outerwear in 4Q, given recent colder weather trends. They also believe DKS’ emphasis on target promos (incl. Southern CA for converted Chick’s Stores) is supporting traffic, following 3Q09 traffic up +2.5%, the 1st increase since 2Q07. Finally, while the Guns & Ammo category should be a comp drag against tough comparisons (NICS background checks in Nov 09 was -20% y/y), better golf category (~20% of sales) comps and margins against very easy comparisons should be more than an offset (Golf Galaxy starts to anniversary 3 quarters of DD% comp declines this 4th quarter, with 4Q08 comps down -20.7%, driven by last year’s strong clearance activity). Merrill notes they have bumped their 4Q09E EPS to $1.15 (from $1.10) and now assume flattish instead of (3)-(4)% 4Q comps.

Expect 2010 rebound from trough margins in 09
DKS’ operating margins should rebound from current depressed levels (Merrill is forecasting a 2009 EBIT margin of just 5.2%), supported by continued inventory management and store level initiatives, including the conversion to self service footwear departments. However, increased depreciation costs associated with a new corporate HQ and potential incremental ad spend related to new markets could impact the magnitude of the rebound in 2010.

Share gains continue; Opportunity for sq ft growth remains
DKS should gain market share from regional competitors and has accelerated its expansion plans in the Pacific Northwest, following the closure of Joe’s Sporting Goods. DKS should maintain 6+% sq ft growth in 2010 and beyond given the opportunity to operate 800+ Dicks Sporting Goods stores in the US (vs. just 420 at the end of 3Q09).

Valuation: Attractive entry point following recent pullback
Following a 17% pullback from October highs, DKS is currently trading at 16.4x Merrill's F2011E (FYE Jan) EPS of $1.30. They are upgrading DKS to Buy and raising their PO to $28, which is 21-22x their F2011 EPS of $1.30. While DKS’s historical 5-yr forward P/E average is roughly 18x, DKS has traded within the range of 21-23x forward P/E during times of sales and margin expansion, and Merrill's outlook should be supported by 1) upside to 4Q09 comp sales guidance 2) expected margin rebound from trough margins in 2009 and 3) continued market share gains and opportunity for accelerated square footage growth.

Notablecalls: The Dick's upgrade from Merrill/BofA probably represents one of the strongest calls we have this morning. I like this call as it's not purely a valuation one:

- Merrill highlights the possibility of better-than-expected comps.

- They see rebound in margins in 2010 helped by new initiatives.

- Dick's looks to have become a formidable force in their space & there seems to be ample room for futher growth.

The stock is down 4-5pts from its yearly highs and there's a 13%+ short interest in the name.

All in all, I think DKS can trade towards the $22.50-23.00 range today. Anything below that is a screaming buy.

Wednesday, December 09, 2009

Accenture (NYSE:ACN) : Downgraded to Hold following cautious checks - Kaufman

I wanted to highlight a rather interesting call this morning from Kaufman Bros. The firm is downgrading Accenture (NYSE:ACN) to a Hold from Buy with a price target of $43 (prev. $41).

Firm notes they are downgrading Accenture ahead of the November quarter (fiscal 1Q10) earnings call scheduled for December 17. Accenture shares are up 30% since September 1 and have rallied 16% since the last earnings call in early October, when the company reported modestly weak results but cited a "remarkable pick-up" in consulting deal activity in September, a plan to begin hiring again and an improved U.S. demand backdrop even as Europe remained mixed. A key issue is whether the uptick in deal activity in fact converted to bookings during fiscal 1Q10 and whether this uptick can carry through into 1H10. Kaufman reached out to multiple industry sources last week to check on these issues.

The feedback pointed to a pace of recovery best characterized as modest, not "remarkable." The consensus was that more clients are moving forward with consulting and systems integration projects (57% of Accenture's mix) that were shelved during much of 2009, but that the bookings pick-up has been modest to date. Several sources that cited a demand pick-up so far in 4Q09 had limited visibility into their client's 2010 IT budgets and were unsure whether the 4Q09 demand recovery could extend into 1H10. The read-though from Accenture's rivals (IBM, Cap Gemini and CSC) has been mixed to negative in recent months and the feedback from Kaufman's sources inside the larger privately held rivals (E&Y Consulting, AT Kearney) was mixed.

'...One former Accenture partner was hearing more about continued cost cutting at Accenture than about any bookings surge, while another source inside a leading management consulting firm cited stable demand but continued pricing pressure. Not a single source cited a "surge" in bookings in recent months...'

Accenture itself has been clear that the November and February quarters would be "challenging" and that the firm has limited visibility into how quickly the recent deal activity uptick would convert to bookings and revenues. To reach its fiscal 2010 guidance, Accenture needs to post a material revenue growth rate recovery beginning in the May 2010 quarter. Kaufman notes they now have less confidence in this recovery trajectory and are trimming their fiscal 2010 constant currency growth rate estimate to negative 2% from zero. They are assuming Accenture can increase its fiscal 2010 margins by 20 basis points to 13.6%, resulting in a modest decline in their fiscal 2010 GAAP EPS estimate to $2.68 from $2.71.

Accenture shares have moved up since November 1 and now trade at 16x firm's fiscal 2010 GAAP EPS estimate of $2.68. This is the highest forward P/E multiple since late 2007 and puts Accenture's multiple back into the range of 15x-20x that investors were willing to pay during the more tranquil 2005-2007 period. A continued march toward $50 would require the P/E multiple to expand to 18x-19x, which, in Kaufman's judgment, may be tough given that the fiscal 2010 growth outlook of roughly zero pales in comparison to the growth rate of 15%-20% that Accenture posted during fiscal 2007 and fiscal 2008. Given the recent increase in the market and peer group multiples they are raising their price target modestly to $43 from $41, based on an assumed multiple of 14x their fiscal 2011 EPS estimate of $3.00.

Notablecalls: This is something I would call equity research. KBRO's IT Services & Software team went out, did their checks and discovered new info. They compared the new findings to consensus expectations and found a potential gap. That's how it should be done.

OK, let's face it - KBRO isn't exactly a powerhouse everyone is listening to. They are not Morgan Stanley. The client base is probably quite small and doesn't have the power to move stocks around in a jiffy. But their findings are interesting nonetheless.

The call comes about 3-4 weeks ahead of earnings, which adds some additional weight to the call.

I think ACN will trade down following this downgrade. The stock has made a nice upside move since March and people will want to book some profits. Especially ahead of Jan. KBRO gives them reason to.

Just remember that ACN isn't exactly a mover. You won't be booking a 1pt+ profit here.

Fine piece of research, though. Next time you want to get the scoop on ACN, I suggest you pick up the phone and call KBRO.

(Can't believe I managed to write this one up w/o any Tiger jokes!)

Tuesday, December 08, 2009

American International Group (NYSE:AIG): Lowering Estimates on weakness in P&C segments - UBS

UBS is out cautious on American International Group (NYSE:AIG) this morning lowering their Street high target of $44 to $32 after taking down estimates.

Weak P&C operating trends
Commercial Insurance/Foreign General combined ratios (excluding current-year catastrophes) deteriorated to 105%/103% in 3Q09, from ~100%/~93% in 1H09 and ~101%/~92% in ‘08. UBS expects continued weakness in AIG’s core P&C segments over the near- and intermediate-terms.

Lowering ’10-’12 operating EPS outlook given weakness in P&C segments
They are lowering their ’10-’12 operating EPS estimates, in part to reflect combined ratio pressures in AIG’s core P&C segments—which could negatively impact AIG’s plans to consider an IPO of Chartis (AIG’s Commercial Insurance unit), as discussed in a recent Reuter’s article.

Restructuring of government terms becoming less likely
AIG’s prospects for restructuring its terms with the government seem less likely, given more negative sentiment surrounding government’s support of AIG. While UBS still thinks more lenient terms would be mutually beneficial to taxpayers and AIG shareholders, government support for improved terms is not clear to us.

Valuation—Lowering price target to $32
Firm's probability-adjusted valuation suggests a value of $32 (from $44), reflecting changes in their outlook on possible restructuring of government terms and P&C margins.

Notablecalls: UBS was pretty much the only firm that had anything positive to say about AIG. Now it looks like they are getting cold feet as well, taking down their Street high $44 target.

Nothing but negative catalysts ahead.

With futures in red , AIG may see accelerated selling.

Dana Holding (NYSE:DAN): 2010 Guidance Could Be Strong Catalyst, raising target to $12 - Barclays

Barcalays is out very positive on Dana Holding (NYSE:DAN) raising their target to $12 (prev. $8) and reiterating their Overweight rating.

Ahead of a series of strong potential catalysts for Dana Holdings (DAN) over the next few weeks, they are raising materially their price target to $12 (from $8 previously) and reiterating their 1-OW rating, reflecting the solid earnings outlook the firm expects for the company as it continues to benefit from its deep cost actions and its large leverage to improving volumes in the light and commercial vehicle markets.

Despite having put to rest all liquidity concerns with a very successful secondary offering in September, and even after a significant price outperformance over the past 6 months (up 529% versus only 180% for the next best performing supplier and 17% for the S&P500), DAN continues to trade at the lowest multiple in the group. Indeed, DAN is currently trading at only 4.0x firm's 2010 EBITDA estimate of $500mm and 3.1x their 2011 estimate of $650mm, well below the 6.0x and 4.4x respective averages for the auto supplier group.

Barclays believes this is undeserved in light of DAN’s new solid balance sheet, and its solid outlook for strong earnings growth as light and commercial vehicle volumes recover. In their view, this discount is largely due to a lack of exposure of the fairly recent senior management to investors, and very limited sell-side coverage. Firm visit of Dana headquarters later this week will provide investors an opportunity to spend time with the CEO and the rest of senior management, but more importantly, the strong 2010 guidance they expect management to initiate in an investor call later this month could constitute a meaningful positive catalyst for the stock, in their view.

On Dec. 10, they are indeed taking a very large group of investors to meet with Dana’s senior management at Dana headquarters in Maumee, Ohio. They will perform a deep-dive into Dana’s operations and strategy, and will meet with:

James Sweetnam, CEO
Jim Yost, CFO
Jacqui Dedo, Senior Vice President Strategy & Business Development
Mark Wallace, President Heavy Vehicle Products and Global Operations

More importantly, Dana has indicated several times recently that it intends to issue earnings guidance for 2010 in the very near future, and certainly before the end of the year. While no invitation has been sent as of yet, Barclays believes that Dana management will host a conference call for investors to discuss its detailed outlook for the coming year.

They expect 2010 guidance to be very solid, which could provide a strong catalyst for the stock. While DAN’s ultimate outlook will depend heavily on which production assumptions it will use, which is difficult to predict, the firm believes that the company could easily guide to a 2010 EBITDA of $500mm as this target is likely reachable almost without any help from improving volumes. In practice, they expect volumes to improve next year in most of DAN’s end-market.

Over the next few weeks, some additional potential catalysts for DAN include:

- ArvinMeritor’s NYC annual analyst day on Dec. 15, 2009, where Barclays expects confirmation of ARM’s mid-term guidance of double digit EBITDA margins. ARM is Dana’s main competitors in the very highly concentrated N.A. market for commercial vehicle axles.

- Dana’s investor meetings around the Detroit Auto Show on January 12-14, 2010.

Dana’s CFO has often indicated that he could see DAN’s EBITDA margin expand back to the 10+% range in a more normalized production volume environment. Barclays does not believe that DAN is getting credit from investors for this expected margin reversion, because they understood this comment as referring to long term margins, achievable only when volumes have recovered to peak levels.

They believe that double digit EBITDA margins are achievable much sooner than investors expect, and possibly as early as in 2011. Firm expects management to make this point very clear over time, starting possibly with its 2010 guidance call, which would likely push the Street to raise mid-term estimates meaningfully.

Notablecalls: This is a fairly significant call from Barcalays' Auto Parts team. They are sitting on huge gains following the July 10 upgrade (see archives) but instead of booking profits they seem to have higher conviction than ever.

With another 50% upside to Barclays' target the stock is likely to see further buy interest. They are highlighting potentially significant catalysts in the n-t horizon which should add some fuel to the fire.

Also note that on Dec 1 Soros Fund Management reported a 5%+ stake in Dana. It's always nice to be in good company.

The stock looks to be ready to break to a new 52-week high.

PS: The main risk here is the general market. Futures are in red and I would certainly not be surprised to see futher selling. This may temper any upside in DAN as well today.

Monday, December 07, 2009

Potash (NYSE:POT): Upgraded to Buy from Neutral at Goldman Sachs

Goldman Sachs is upgrading Potash (NYSE:POT) to Buy from Neutral with a $140 price target.

According to the firm the upgrade is based on an improved demand outlook for potash in 2010 both in the US and globally. Over the past few weeks, datapoints have confirmed returning demand and they believe POT offers the most attractive way to play a potash recovery. Goldman believes US farmers will significantly increase applications vs. significantly weak 2009 rates, and worldwide demand should pick up following the long-awaited China contract settlement. Finally, investor sentiment on fertilizers has improved meaningfully, yet they believe we are still in the early phase of this upcycle. Firm sees 20% potential upside to their $140 price target.

Goldman notes they want to own POT shares today for two primary reasons:

1. The impending China contract settlement should serve as a major catalyst for the global potash markets and fertilizer stocks. This could come as soon as this month, but we more conservatively expect a settlement by mid-February. Settlement of the China contract will give retailers and dealers’ confidence in restocking inventories throughout the supply chain.

Given recent improved demand trends, including higher prices in the Chinese domestic markets, they believe the risk of a damaging contract settlement is diminishing. When the contract settlement finally occurs, they expect it to set off a global demand spurt as buyers will come out of the woodwork to secure potash for 2010. Buyer confidence is key to the market right now, and until the China contract settles, uncertainty remains. That said, similar to the US, Goldman believes farmers across the globe are likely to return to the market and buy potash for 2010 application.

Recent anecdotes from their China analyst suggest that the domestic potash market in China has thawed in recent weeks and demand is pulling inventory through the supply chain. Producer inventories have fallen meaningfully, according to Goldman China analyst, and are now about 3 million mt vs. the prior estimate of an excess of 4 million mt due to inventory draw downs during the recent weeks. Accordingly, prices have recently strengthened within China—from $350/mt up to $425/mt (at the retail level) depending on quality (with Canadian potash receiving a premium).

2. Investors are likely underestimating the 2010 US demand recovery that could see staggering yoy percent increases in volume given the depth of the 2009 reduction and the atypically weak fall consumption levels.

Over the past 4-5 weeks, they have spoken to many industry contacts—from farmers to producers—and sensed a critically important sentiment change within the fertilizer industry that potash demand is returning, and that fears of another decline in application rates are overblown. After spending time in the field over the last few weeks and discussions with various industry contacts, the firm ise now highly confident that farmers do not doubt the need to replenish their soil, and will do so at rational prices.

POT is the best way to gain from the 2010 potash rebound
Goldman views Potash Corp. as the best way to play a rebound in the global potash markets given its high earnings leverage to potash prices and volumes as well as being the natural large market cap choice for investors looking to gain exposure given its size and trading characteristics. Compared to Mosaic, POT has higher potash exposure; compared to Intrepid Potash, POT has a significant market cap advantage ($37bn vs. $2.5bn) as well as much lower unit production costs. They believe that POT is portfolio managers’ ideal choice for potash exposure.

Valuation, reflecting abrupt sentiment changes, can be volatile
After the recent run, which was NOT accompanied by a rise in estimates, fertilizer stocks look significantly more expensive than just a couple of months ago. Of course, the same can be said across the market if looking back to the March 2009 lows. Goldman notes they are conscious, however, of the role sentiment plays in these names, which can lead to seemingly stretched valuations relative to historical standards based on investor expectations for upward earnings revisions. In POT, for example, downward earnings revisions over the past three months have come hand-in-hand with higher multiples and significant stock appreciation as investors willingly look past any near-term earnings weakness and toward the rebound potential for 2010 and beyond.

Moves like these where share prices are moving in contrast to earnings revisions, indicates that market (buy-side) expectations had adjusted lower more quickly than sell-side. Indeed, they find the sell-side applied its highest rating on the shares as earnings were peaking essentially exhausting the chance for additional upgrades and creating asymmetric risk to the downside. However, now that we are closer to an earnings bottoming the firm sees a much more balanced spread of analyst ratings. This is a bullish signal suggesting that as industry fundamentals improve we could see analysts upgrade the stock.

Notablecalls: Well, Goldman is surely playing ketchup here with POT. Several other firms upgraded POT 20pts lower and I suspect Goldman's Agriculture team was praying for a sizable pullback to upgrade the name. They got one on Friday and voila..we have an upgrade.

While it's tough to love POT here Goldman does highlight the China contract catalyst hinting it may come earlier than most expect. I think most of you have seen the moves in some of the Chinese Agri names which seems to indicate there is something going on in the sector. If they can strike a deal here I suspect pricing would likely be on the more positive (closer to $400) side.

Note we have UBS out somewhat positive on the Fertilizer space, upgrading Agrium (NYSE:AGU) to Buy saying things should return to normal by 2011. This should add some fuel the the fire.

POT is trading close to its 52-week highs & we may see a breakout today. Note that Goldman's $140 target is the new Street high target for POT.

Friday, December 04, 2009

Goodyear Tire & Rubber (NYSE:GT): Likelihood of an upside surprise for Q4 - J.P. Morgan

J.P. Morgan is out very positive on Goodyear Tire & Rubber (NYSE:GT) reiterating their Overweight rating and $22 price target ahead of a potentially very good Q4 #'s.

While it is early to make a definitive preview on tire company quarterly earnings, the firm is increasingly seeing the likelihood of an upside surprise at Goodyear for Q4 and advise adding to positions now, while the interest level remains muted. Preliminary US November tire shipment data are not out yet, but various industry sources indicate that the y/y increase in consumer replacement could be midteens. This, coupled with recent pricing developments, reinforces the view that tire industry conditions have turned a corner.

Q4 Volumes Shaping Up Well – If Nov is +15% y/y, that would imply US consumer replacement shipments in Nov are -3.5% m/m, much better than the -9.4% average seasonal decline witnessed between Oct and Nov over the past 10 years, suggesting demand may be genuinely improving off the bottom (not just because of easy year-ago comps). Further, if one estimates December consumer replacement volumes are +13% y/y (implying -5% q/q, reflecting some seasonality but also perhaps some prebuy ahead of GT’s Dec price hike), Q4 US consumer replacement tire shipment could be estimated at 58.4MM units (only -3.5% sequentially from Q3’s 60.5MM). Estimating sequential Q4 volume change in other US end-markets is less difficult, in J.P. Morgan's view: NA consumer OE should be +15% (based on relatively high quality CSM Q4 production schedules), and let’s assume commercial OE and replacement are both sequentially flat (some uptick seems to be happening in CV OE build, but they remain conservative on this segment given advertised excess inventory issues).

Bridgestone Price Hike Comes on Heels of GT’s Hike: Goodyear’s up-to-6% recent price hike (effective Dec 1) was given more sticking power by Bridgestone’s up-to-5% price hike announced two days ago (effective in Jan) (Michelin may not be that far behind such an announcement). The benefits of the price hike may help Q4 NAFTA profits by $15MM, though it is not clear whether or not this was baked into Q4 guidance. Either way, it sets CTB and GT and most global tire makers up well for Q1.

Tire Stock Views: J.P. Morgan remains Overweight in both Goodyear and Cooper. But GT seems more interesting at this juncture, though they continue to be bullish on Cooper as well. GT shares have only modestly recovered from the value lost post Q4 guidance, but firm's view on normalized earnings has not materially changed. Further, macro conditions are improving somewhat faster than expected (volumes, pricing, FX), suggesting beating reduced Q4 expectations may not be that hard.

GT now trades at a nonmeaningful P/E multiple on JPM 2009E EPS and approximately 13.7x revised JPM 2010E EPS. Firm rates GT Overweight as they believe industry volumes have troughed. J.P. Morgan's Dec 10 price target of $22 is based upon 8x their unchanged estimate of normalized EPS of $2.75 (midrange of previously stated $2.50 to $3.00).

Notablecalls: I must say that I like this call from JPM's Tires, Automobile Manufacture team, lead by Himanshu Patel. What I like most about this call is that they are not alone. Unnoticed by many, Keybanc's excellent Auto team had this to say two days ago:

// Within the last several days, several tire manufacturers have announced price increases in North America (to take effect January 1) to cover the cost of rising raw materials. This is positive for the industry and consistent with the note we wrote in early November following our trip to the SEMA show. We expect several other manufacturers, including Cooper and Michelin, to join the others and announce their own price increases within the next several weeks.

The following lists price increases already announced by manufacturers:

Bridgestone – 5% (just announced yesterday)
Continental – 5% (just announced yesterday)
Yokohama – 6% (just announced yesterday)
Nexen – 8% (announced last Friday)
Goodyear – 6% (effective December 1)
Falken – 7% (effective December 1)

Tire demand is improving and manufacturers with whom we have spoken are struggling to keep up with demand. With September inventory levels remaining very low (down 25% from September 2008); it could be 6-9 months before inventory levels return to normal rates. While official data is not yet available as the month just ended, we estimate that consumer replacement tire shipments in November could have been up by as much as 15% year-over-year.

Given these positive trends, we remain bullish on the tire industry. Our ratings on Goodyear Tire (GT-NYSE), Cooper Tire (CTB-NYSE) and Cabot (CBT-NYSE) remain BUY. //

Goodyear (GT) is down 5 pts from the $18+ level it was trading before the Q3 #'s and we have two very good firms calling for surprisingly good numbers. I can understand people not noticing Keybanc's commentary but I think JPM will get attention.

While it's kind of tough to make a call here, I suspect GT may see some buy interest in the n-t, possibly even today.

I want to see a slight gap-up in the shares this morning which may ignite a larger upside move. Could trade above $14.00 in a hurry and continue higher throughout the day. If they get this one going, it can trade up 6-8%.

Wednesday, December 02, 2009

Airlines: Upgrading to Attractive; Bullish on Airline Cycle at Current Levels - Morgan Stanley

Morgan Stanley is out upgrading the Airline sector to Attractive, upgrading AMR Corp (NYSE:AMR) and Ual Corp. (NASDAQ:UAUA) to Overweight from Equal-Weight.

Upgrading Industry View to Attractive on improving risk/reward of the airline “cycle call.” Morgan Stanley notes they have updated their estimates and liquidity projections for 2010 to account for recent trends/news events. Additionally, they are moving their valuation levels to YE10 from YE09 and raising base case valuations across all airlines.

Importantly, the firm expects investors’ liquidity concerns to dissipate in the coming months as investors incorporate the full implications of US Airways’ (LCC) recent liquidity improvements. Now that 1) previously exuberant expectations have normalized as evidenced by price action in the last 1-2 months vs. improving trends and 2) the risk of a liquidity squeeze at a major carrier in 2010 has fallen; firm believes investors will become increasingly willing to bet on the cycle.

Unlikely to get a markedly better entry point in the coming months. Though they believed that airline profitability is improving, they were reluctant to make the “airline cycle call” ahead of 3Q09 earnings like many of their sell-side peers on the belief that investors would be able to get a significantly better entry-point near-term. Since the firm reiterated their In-line Industry View (see Staying on the Sidelines for Now 11/2/09), many of the five indicators they noted they were watching to become more constructive on the space have turned more favorable. Moreover, Morgan Stanley also believes that they are on the cusp of a stream of positive catalysts for the group that will showcase substantial 2nd derivative improvement in revenue and only subsequently will they see evidence of the anemic rebound that has concerned us. Therefore, they believe investors will be hard-pressed to identify a better entry-point for the cycle call in the coming months.

Re-orienting Airline Ratings. Consistent with Morgan Stanley's evolving industry view, they are adding risk to their recommendations. As such, they are upgrading both AMR and UAUA from EW to OW and downgrading shares of ALGT (OW to EW) and ALK (EW to UW).

Upgrading AMR to OW from EW. AMR's recent liquidity-enhancing transactions have placed the company more firmly in the "Survivor" basket, particularly considering industry trends are broadly improving. Though their projected headline EPS losses and difficult union negotiations are risks, the firm believes investor willingness to bet on the cycle using this highly leveraged airline equity is likely to overcome these marginal negatives.

Why Now? As a carrier formerly not included in firm's “Survivor Basket”, AMR is still perceived to have more liquidity risk than they think is appropriate. Furthermore, we believe that the industry is on the cusp of a multi-month series of positive catalysts. Given AMR’s leverage to the cycle, they believe this is a setup for a likely move higher.

UAL Corp. (UAUA, OW) Upgrading UAUA to OW from EW. UAUA’s leverage to the industry revenue cycle and underperformance through the downturn is likely to become a relative positive as investors focus on rapidly improving YoY revenue trends over the coming quarters. Furthermore, recent liquidity injections are likely to improve investor willingness to look through the cycle into 2011, when the company generates significant FCF per MSCO's estimates.

Why Now? Similar to AMR, but with even more leverage and suffering from more negative sentiment with respect to liquidity, in firm's view; UAUA is likely to move higher as investors focused on the airlines with the most leverage to the cycle in the face of positive catalysts.

Notablecalls: AMR and UAUA - 5-7% movers today for sure. Maybe even more. Note Goldman Sachs was positive on Airlines yesterday and the stocks have been pushing higher.

Getting a bump from Morgan Stanley is exactly what the doctor ordered for these to take off again.

AMR can trade to $6.75+

UAUA can trade to $8.75+

Let's see how it works out.