Tuesday, June 29, 2010

Akamai (NASDAQ:AKAM): Downgrading to Neutral from Buy - Merriman

Merriman Curhan Ford is downgrading Akamai (NASDAQ:AKAM) to Neutral from Buy based on valuation.

The stock is up 80% this year and has reached Merriman's valuation range of $40-48. While the fundamentals should continue to improve, they believe the stock is already reflecting the potential upside to estimates in 2010 and 2011.

Consensus estimates are likely to see upside from improving pricing and volume trends in the Media & Entertainment (M&E) vertical. Merriman notes their revenue estimates are ahead of consensus and they acknowledge that both have room for upside. Feedback from a recent content delivery summit and from competitors indicated that online video delivery pricing declines have moderated and volume growth has accelerated. During 2010, pricing is expected to decline 20%, a moderation from the 40% decline experienced in 2009, while volume (in bits) is expected to grow 45% in 2010, up from 30-35% in 2009.

Valuation likely already capturing the upside in financials. Currently, the stock is trading at EV/EBITDA of 15.9x (FY10E) and 14.1x (FY11E) with EBITDA growth of 18% and 13%, respectively. On a P/E basis, the stock is valued at 32x and 30x, respectively. Even with some upside in estimates, the firm does not expect the valuation to get attractive enough to see a further 20% or more upside in the stock. Also, margins are not likely to expand from currently levels, hence, the EBITDA and EPS growth will move in lockstep with revenue growth. With nearly $1.0B in net cash, the company could make accretive acquisitions that would accelerate growth further and justify higher valuation multiples.

Notablecalls: Merriman's Richard Fetyko upgraded AKAM back in March when the stock was around $27-28 and is now downgrading it at $44 or over 15 pts higher. That's a nice call.

For the sake of objectivity, Fetyko did downgrade AKAM to a Sell back in Oct 2009 when the stock was at $18 only to upgrade it back to Neutral on Feb 2010 when it was at $26.

I watched Amazon.com (AMZN) get hurt on a Susquehanna downgrade yesterday morning, which leads me to think AKAM could see some selling here as well. Furthermore, AKAM is up way more than AMZN over the past months, which could contribute to selling pressure.

Monday, June 28, 2010

Avis-Budget (NYSE:CAR): Management meeting takeaways – demand trends remain solid

Avis-Budget (NYSE:CAR) is getting positive comments from two tier-1 firms this morning:

- Barclays is reiterating their Overweight rating on CAR and is raising their price target to $16 (prev. $15) along with 2010-2012 estimates.

They believe that earnings for the car rental industry will reflect an increasingly large benefit from the solid improvement witnessed in most business fundamentals and from the deep cost actions taken by the industry. The three main factors which boosted profitability over the past year should indeed continue to provide a tailwind:

- Continued improvement in car resale values and better pricing on purchases of new cars, are reducing fleet costs y-o-y
- Very solid traction in cost savings actions are boosting margins
- Sustained leisure pricing and recent improvements in corporate pricing

In addition to these trends, Barclays believes that the industry is now in the very early stages of a solid expected recovery on the demand side, with rental day comparisons expected to turn positive this quarter, following nearly 2 years of sharp declines. This is material in their view because, having been able to improve profitability in the downturn through large cost and pricing actions, getting help from the demand side will likely create a very large operating leverage and boost earnings growth.

They believe that the recent large uptick in travel trends will translate into a recovery in car rental demand over the rest of 2010 and some more in 2011 and 2012. For CAR, the firm conservatively forecasts domestic days up 2.3% in 2010 and 3.7% in 2011. While this would still leave domestic demand well below the peak levels of 2006-2007, they believe that CAR’s earnings power could recover to above the 2007-08 levels already this year, and get close to the historical peak earnings achieved in 2005 by 2011, benefiting from the major cost improvements realized in the downturn and from the strong operating leverage.

All in all, Barclays' 2010 and 2011 corporate EBITDA estimates are now $426mm and $475mm respectively, up from our previous $380mm and $455mm. They are also initiating a 2012 estimate of $522mm, based on further recovery in car rental demand.

CAR stock price has dropped significantly since the company indicated it wants to top HTZ’s bid for Dollar Thrifty. At current levels, they believe that CAR offers a compelling deep value opportunity regardless of the outcome for DTG, based on the solid earnings trajectory we expect at least through 2012.

Firm's new $16 price target is based on a 7.0x multiple of their new 2011 corporate EBITDA estimate of $475mm, and represents a 15.1x multiple of their 2011 EPS of $1.06, both in line with CAR’s historical average valuation. Firm notes that they arrive at the same price target whether they treat CAR’s $345mm in convertible bond as debt or assume it is converted into common equity.

- Goldman Sachs is out positive on CAR (while Not Rated due to the DTG deal) following meeting with management.

Firm notes CAR management indicated that it “feels good” about 2Q2010, expecting that 2Q will be a bigger quarter than 1Q. While 2Q pricing can be challenging because of seasonality (2Q is the shoulder period between Easter and summer where the industry typically builds its fleet ahead of the summer peak), aggregate volumes are up sequentially as corporate demand continues to be strong. Although investors are concerned about recent trends, management has not seen any changes in the last six weeks. Regarding the upcoming summer months, the company indicated that reservations to date are showing pricing and volume up mid single digits.

Management believes fleets generally remain tight and the industry’s June 1 price increase appears to be sticking. CAR has not seen any material examples of competitor “cheating” (i.e. stealth discounting). The company anticipates it may be able to reach the upper end of its targeted $40 mn to $60 mn in cost saves this year. Management also believes that the used car market should remain healthy for several years, one reason OEM’s are offering more attractive program car deals.

Goldman ntoes they hold an Attractive coverage view on the rental car sector given their belief that corporate travel will recover at a faster rate than expected and that supply remains balanced as car manufacturer restructurings reduce the near term risk that excess cars are pushed down to the rental car

Notablecalls: The comments, especially the ones coming from management (via GSCO) regarding the past 6 weeks being on track should provide at least some temporary relief to the stock.

Short interest stands at a healthy 17% and the stock is down 5pts from its recent $16.50 high.

I'm not expecting a large move but I think we will see some buy interest in CAR today.

Remember that the DTG situation continues to loom..

Friday, June 25, 2010

VMware (NYSE:VMW): Heavy discounting will lead to earnings misses in 2H10, Init Sell & $40 target - Capstone

Capstone Investments is making a major negative call on VMware (NYSE:VMW) initiating the tech high-flier with a Sell rating and a whopping $40 price target.

It gets worse, folks. Reading the call it looks like Capstone analyst James Gilman (CFA) is accusing VMware management of artificially propping up license revenue by offering 'shadow' discounts of up to 70%, that haven't shown up in the income statement side yet.

They believe the discounting has continued since Q409, albeit on a smaller scale. They expect this discounting to lead to revenue and earnings miss in 2H10.

Capstone notes they come to these conclusions after performing a detailed analysis of deferred revenue due to the exceptionally large sequential increase in current deferred revenue in Q409 absent a corresponding proportional increase in revenue from license sales.

Firm notes they contacted VMW management but as Gilman says '...Their response and explanation only fueled our curiosity. If they were able to address our concern then we would have dropped this subject, but we thought management downplayed our question by reiterating information from the 4Q09 earnings call... '

Notablecalls: There are two reasons why I cannot share more of this call with you:

- First, the call PDF is copy-locked.

- Secondly, Capstone is a small firm and they have clearly invested a lot of time & money into digging up all this. It would certainly be unfair for me to share the details with non-clients.

So if you want the deets, call them up and set up a relationship with the firm. I'm sure many inst. players that are long (or short) VMW will do just that today.

So, what to do with the stock?

Ask yourself this - with the stock trading 16x FCF (gazillion times EPS), would you still want to be long the name if Capstone is proven right?

For one, I'd want to be short.

The market right now is in shoot-first-ask-questions-later mode so I expect VMW to get hit once the call starts circling the desks.

In the very short-term, I'm looking at $65 as the 1st level & possibly $61-62 over the next few days if panic sets in.

I really don't think people take kindly to financial shenanigans.

PS: Also, ask yourself this - what would happen to the stock if the call was coming from J.P. Morgan instead of Capstone?

Research in Motion (NASDAQ:RIMM): Sing me no song! Read me no rhyme! Don't waste my time, Show me!

Research in Motion (NASDAQ:RIMM) is getting no love from the analysts this morning after missing consensus revenue, ASP & volume estimates last night.

While there are analysts preaching their 'RIMM's cheap at 9x FY11 EPS' views, I'm going to highlight the more cautious-to-negative views from several firms:

- Bernstein's Pierre Ferragu has been cautious on RIMM for quite some time and rightly so. He maintains his Underpeform rating and $55 target on the name. This is what he has to say:

The set of result supports our thesis: RIM gains traction via the trading down of the brand and is
losing ground on the corporate / high-ASP consumer segments:

- Growth in international markets and low ASP segments continued to play out positively, with a positive impact on margins and a negative impact on ASP. ASP of incremental business1 remains extremely low at $165 this quarter, vs. $390 a year ago.. It is important to note that the slow down in overall shipment growth also supported margins as it increases the share of services in the company's revenue mix. This quarter, SG&A control and the share buyback also supported the EPS that would have been in line with our expectations without these two factors.

- Management comments are still overly optimistic about the positive impact of new product launches for the second half of the year and we remain cautious on that front: new products will hit the high end of the market in which Blackberry show continued signs of weakness, as shown by the low ASP of incremental business and recent consumer surveys.

Our initial bear case was based on three convictions. It is priced in the levels the stock was trading at aftermarket yesterday.

- BlackBerry phones have lost their breakthrough differentiation (the flawless mobile email) that is now available on most smartphone platforms. In the elements that underpin the current smartphone experience, BlackBerry specific technology isn't a clear competitive advantage.

- RIM's pricing power is still strong but now derives only from "trading down" dynamics that won't last forever. This will deteriorate in the long term as RIM shifts towards a market place in which scale, breadth of product portfolio, and distribution matter more and more.

- RIM's initial markets (Corporate and high-end consumer / "prosumer") don't drive growth
anymore. As a consequence, in the medium term, we expect a disappointment in shipments and / or ASPs in the next 6-9 months.

We foresee additional downside risks which are likely to accelerate RIM's decline, but it is unlikely that these risks materialize this quarter.

- Accelerating share loss in existing channels. Apple's expected iPhone expansion into additional
carriers over the next 12 - 18 months will likely come at RIM's expense. RIM currently distributes through 10 of 13 carriers that Apple could expand into, and our analysis suggests that RIM would lose up to two-thirds of its growth potential (or 7M+ units) if Apple were fully represented in 2010 in those 13 carriers.

- Mounting risks of share loss in the corporate business that account for over half of RIM's profits. The latest Bernstein CIO survey points to 41% of companies issuing or supporting the iPhone (up from 11% two year ago), and AT&T recently stated that 40% of its iPhone sales this year have been to business customers.

As a consequence, we maintain our underperform rating. We nevertheless keep our price target unchanged for now, as we wait for more clarity on how much of these additional downsides can play out in the next 12 months.

- Goldman Sach's Simona Jankowski reiterates her Sell rating on RIMM with a $56 target (unch):

RIM has now missed top-line expectations for three of the last four quarters, in our view demonstrating the building competitive pressures on its business from the iPhone and more recently from Android. We estimate that net subscriber additions in North America declined on a sequential basis, which we attribute primarily to the success of Android-based phones, such as the Motorola Droid and the HTC Incredible at Verizon.

Despite the top-line miss, RIM delivered EPS upside largely by cutting opex, with SG&A declining 3% qoq as opposed to its guidance for a 2-4% qoq increase. In addition, gross margin of 45.4% was above expectations of 44.4% as a result of a greater mix of higher-margin legacy EDGE products such as the 8520. However, we do not view either of these factors as sustainable drivers of EPS upside longer-term. RIM guided opex up 7- 10% qoq, compared to sales guidance of up 6% qoq, and reiterated its guidance for gross margins to decline in 2H FY11 as new products ramp.

We are updating our FY11/12/13 EPS estimates to $5.28/$4.79/$4.75 from $4.76/$4.78/$4.92, reflecting the near-term margin upside and deteriorating longer-term top-line trajectory. We remain Sell-rated until we can build confidence that RIM’s product cycles can improve its competitive position

- Citigroup's Jim Suva reits his Sell rating on RIMM while lowering his target to $50 (from $55). After hours RIMM stock traded down 4-5% following the May quarter results which were a mixed bag but certainly not the stellar results bullish investors were hoping for & opened the door for more questions.

Stock Call — Reiterate our Sell Rating & lowering our target price from $55 to $50 as we roll forward our EPS valuation one quarter & we expect EPS to decline in the future (stock buyback may mitigate some but core EPS likely declines) due to lower gross margins & higher op ex spend. Our investment thesis focuses on BYOD (Buy/Bring Your Own Device), Sandboxing (corporate security & regulatory compliance rules & data compression on phones that have virtualized work & personal functionality), & Promotion Commotion (carriers changing promotions) in early adoption.

- Baird's William V. Power is downgrading RIMM to Neutral from Outperform while lowering his target to $59 (from. $88)

Based on our store visit findings and product roadmaps, we expect further share gains from Android-based devices, as well as the iPhone. New Blackberry devices should help, but we increasingly fear it may be too little too late to turn the tide in the U.S. Despite what appears to be an attractive valuation level, we expect competitive concerns to continue to overhang the shares.

Notablecalls: Some of you may disagree with me for highlighting only the negative comments but do think twice before hitting that Send button on the hatemail - Did you really expect me to highlight RBC Capital Mark Abramsky cutting his Street high $120 target to $90 while keeping RIMM as his Top Pick?

As Bernstein and Goldman point out, RIMM would have missed bottom line estimates had they not cut their opex. In this competitive environment you can cut opex by only so far. Sooner or later it's going to come back and bite you in the arse.

I have said it before & I will say it again - RIMM is fighting a losing battle.

I'm not even talking about the iPhone stealing their clients but rather Android coming for it's pound of flesh in a big way. The carriers & developers are turning their focus on Android and leaving RIMM on the background.

Unless RIMM can come out with TOTALLY new kind of products, offering something mindboggling, they are slowly but surely turning into...Nokia. It won't happen overnight, not this year, maybe not even next, but eventually RIMM is going to find itself with much lower margins.

Take a look at their current product pipeline:

Boring, right?

I'm not making a trading call to short it here. RIMM's cheap right now (although it's now likely a value trap) and has a considerable short interest. Sure, it could go down a cpl of more points on heels of this commentary but it could also bounce.

I'm staying away..both short-term & longer-term.

PS: Abramsky's note is titled: 'Sing me no song! Read me no rhyme! Don't waste my time, Show me!'

Apparently, Mike's into musicals...

Nothing wrong with that!


Thursday, June 24, 2010

Equity Outflows Unstoppable, As 7th Sequential Outflow Of Domestic Equity Funds Brings Total YTD Redemptions To $29 Bn

Wanted to highlight something that was sent to me this morning:

The market has gotten to the point where, at least according to ICI, no matter what stocks do, all equity investors do is pull money out. The week ending June 16 was the 7th sequential week in a row to see domestic equity mutual fund outflows: $1.8 billion was redeemed, bringing the total for the 7 week period beginning May 5 to ($30) billion, and year to date to ($29) billion. Yet instead of following the trail of money (wrong direction), stocks are hanging on to the EURJPY and the several HFT algos, which together with the prime broker brigade keep the market afloat against the natural flow of funds. And even as equity redemptions refuse to abate, inflows into bond funds are as resilient as ever, perhaps explaining the surprisingly strong bid for both IG and HY over the past two weeks, where some very shady bonds have broken above par as HY underwriting syndicates hope the issuance window stays open at least one week more, before we see yet another record HY fund outflow.

Wednesday, June 23, 2010

Domtar Corp. (NYSE:UFS): Credit Suisse raises target to $125 - new Street high

Domtar Corp. (NYSE:UFS) is getting some very interesting commentary this morning:

- Credit Suisse is raising their target to $125 (prev. $105) noting that since they initiated coverage of the paper and packaging industry at Credit Suisse back on May 5th, 2009, they had assumed a relatively gradual cyclical recovery with 2013 as the likely peak pricing year for most pulp, paper and paperboard grades. As the firm wrote on June 17th, they now see a more vigorous upcycle than they envisioned back in the spring of 2009.

As they stated in their June 17th note, they now see the peak of the current pulp, paper and paperboard pricing cycle as 2012, versus 2013 previously.

$100-$200/Tonne Pulp Correction Seen: As they have written, Credit Suisse sees a second half 2010 pulp-price correction followed by rising prices for most of 2011 and 2012. They even build in some impact on uncoated prices. Yet, their 2010 and 2011 EPS estimates are the highest on the Street.

Domtar Estimates Rise: As a result of their current view of the cycle, Credit Suisse is raising their EPS estimates, with 2010 moving up by $1.90, to $9.35, with 2011 rising by $2.10, to $10.00, and with 2012 (now the expected peak) jumping by $2.90, to $12.50.

Running Out of Net Debt Next Year?

Exhibit below shows the recent history and our expectations for Domtar’s net debt “destruction.” Specifically, Credit Suisse sees the company running out of its net debt position by the end of 2011, even though we assume that the company repurchases about $140 million of stock over this period. They note the board recently authorized a $150 million share repurchase.

Free Cash Flow Exceeds Stock Price
For the four years 2009 through 2012, they estimate that Domtar will generate free cash flow per share (before dividends) totaling $68.85. Looked at differently, the company’s free cash flow per share for this year and the next two years will equal 97.3% of the stock price seen at tonight’s $54.36 close. Firm believes the market is seriously underestimating the company’s free cash flow generation, particularly given that Domtar has between $3-$6 per share in “excess” deprecation each and every year based on the purchase accounting applied to the Weyerhaeuser assets acquired in 2007. Credit Suisse also point out that they build in a substantial, $100-$200 per metric ton (tonne), correction in market pulp prices during the second half of 2010, with prices resuming their uptrend for most of 2011 and 2012.

Target Up to $125: Credit Suisse's one-year target price now reflects their cyclical peak target of $125, as they now see the stock reflecting the 2012 peak by mid- 2011, or about one year from now. In 2007, Domtar traded near $140 despite having $2.5 billion in net debt and generating much lower earnings and cash flow than currently.

- Goldman Sachs is removing Domtar (UFS) from the Americas Conviction Buy list (maintain Buy) as: 1) they expect a pause in the pulp price cycle as news flow softens thru the seasonally weak summer, when demand slows and inventories rise and 2) they under appreciated the multiple compression as pulp and paper prices rose to historic highs. However, the firm maintains their Buy rating as they expect uncoated freesheet prices to be sustainable and for Domtar to generate nearly $14/share in free cash flow in 2010. Since being added to the Conv. List on 3/16/2010, Domtar is -18.9% vs. paper/forest peers -7.2%, S&P500 -5.5%; over the past 12-months, Domtar is +244.5% vs. S&P500 +22.6%.

Goldman maintains their Buy rating on Domtar shares and make no changes to their 2010-2012 EPS forecasts or 12-month price target. Although there is likely to be headline risk for pulp through the seasonally weaker summer, they maintain their Buy rating on Domtar stock given: 1) strong earnings leverage to robust uncoated freesheet (UCFS) and pulp prices; 2) upside to their 2Q2010 EPS estimate on stronger-than-expected UCFS and pulp prices; 3) improving balance sheet and massive free cash generation; and 4) valuation is compelling trading at a +25% free cash flow yield and only at 3.6X 2010 EBITDA. On mid-cycle cash EPS and EBITDA, Domtar is trading at 4.7X and 6.7X, respectively, levels they believe to be inexpensive.

The firm sees 56% upside to their 12-month $85 price target (PT), which is based on their 2011 cash EPS and EBITDA estimates of $13.90/share and $1.1 bn and 6.1X and 4.5X multiples, respectively. Goldman estimates Domtar will generate nearly $14/share of free cash flow in 2010 and 2011. With a balance sheet expected to be near 1.0X levered in early 3Q2010, they expect Domtar will step up its return of cash to shareholders through increased dividends and share repurchase.

Notablecalls: Credit Suisse's call with a Street high target of $125 trumps Goldman's cosmetic change to their Conviction Buy list.

Credit Suisse's Paper Products team has been around for several cycles, so they tend to know what they are talking about.

Remember the huge Louisiana-Pacific (NYSE:LPX) call back in March 2010?

UFS is a mover and CSFB's call offers way over 100% upside.

I think UFS can move nicely today, possibly to the tune of 5-7%, putting $57-58 levels in play.

I also think UFS stands to benefit from this call over the next several days, putting higher levels in play.

Monster Worldwide (NYSE:MWW): Getting Back On Board The Monster: Upgrading MWW To Outperform - Oppenheimer

So, what company is likely seeing a fundamental bottom, is poised to benefit from a cyclical (albeit modest) employment recovery, anticipates 15%-20% bookings growth this year, has reduced costs by $200M over the last 3 years, has refreshed its product offering, reorganized and ramped its sales force, could realize 50%+ contribution margins on incremental revenue, is acquiring a low-price competitor at a reasonable price at the bottom of the employment cycle, has a 20% short interest, and trades at ~5x FY12 EBITDA estimate?

Answer: Monster Worldwide (NYSE:MWW)

With that riddle solved, after three years on the sidelines Oppenheimer is upgrading MWW to Outperform from Perform and establishing a $21 price target.

Since MWW's current management team took over in 2007, the company has achieved significant (close to $200M) cost savings, invested to refresh its product offering, reorganized and ramped its sales force, and rationalized its marketing spend. Oppenheimer believes a majority of the heavy lifting is behind the company and MWW is now well positioned to benefit from an improving macro employment environment and likely share gains over time. Earnings remain depressed, but should improve robustly on a lagged basis into FY11/F12 as bookings (new sales) growth rebounds cyclically along with hiring/turnover trends and from an improved competitive position.

Oppenheimer notes their estimates are significantly more conservative than management's "normalized" long-term expectations, and they have applied a significant risk/time discount factor to their valuation methodology. Nevertheless, firm's discounted price target of $21 implies ~55% upside from current levels, with significant further appreciation potential assuming MWW executes on its intermediate-term sales goals. While they might be early on their thesis and significant uncertainty persists regarding the duration and magnitude of the employment recovery, the upside potential for the shares is too great for us to ignore if the employment recovery holds and MWW comes close to executing on its intermediate sales and business model goals.

Not only is MWW positioned to benefit from a cyclical (albeit moderate) employment recovery, but its competitive position has been improved as a result of its new resume search capability and its pending acquisition of HotJobs.

- Booking growth is on track to reach the company's 15%-20% goal for FY10, which should drive double-digit revenue growth in FY11 with very high (50%+) incremental margins. Aided by significant cost take-out, MWW should be able to exceed its 22% prior peak margins with a return to peak revenue.

- Opppenheimer notes they appreciate the bear thesis implicit in MWW's high (20%) short interest. However, while they do not dismiss long-term competitive concerns, they have yet to see evidence that social networks or other sources of hiring have gained meaningful share of the online recruitment market in the last five years.

- Adjusted to include HotJobs, Opco's EPS estimates are now $(0.18) for FY10 and $0.21 for FY11. They introduce their 2012 estimate at $0.82, which is based on significantly more conservative assumptions than management's but demonstrates the significant operating leverage potential.

- Opco's $21 PT implies ~8x their FY12 EBITDA estimate ($296M), well below historical levels, and reflects a time/risk discount given the uncertainty regarding the pace and slope of the employment recovery. They might be early but they suspect downside for the shares is limited, while upside could prove very significant over the next couple of years.

Notablecalls: Monster (MWW) looks like it may be ready to bounce on this call.

Note that Credit Suisse upgraded the name 4 pts higher on April 20, with a $22 price target and managed to squeeze out a 7-8% move on the same day. The stock appreciated another 10%+ during the following 3 days.

Apart from market sentiment, I must say very little has changed fundamentally since then.

So I think MWW can bounce today, to the tune of 6-8%, putting $13.40-13.60 levels in play.

Edwards Lifesciences (NYSE:EW): Downgraded to Neutral from Conviction Buy at Goldman Sachs

Goldman Sachs is downgrading Edwards Lifesciences (NYSE:EW) to Neutral from a Conviction Buy. Their price target remains at $60.

Goldman notes their estimates and price target are unchanged. Since being added to the Americas Conviction Buy List on January 8, 2010, EW is up 22.5% vs. the S&P Healthcare Equipment Index of 1.1%. While on the Americas Buy List since October 28, 2009, EW is up 42.4% vs. the S&P HC Equipment Index of 12.1%. Over the past 12 months, EW is up 67.0% compared to the S&P HC Equipment Index up 27.7%. The firm continues to see Edwards as one of the most compelling growth stories in MedTech; however, they think this is reflected in the stock at current levels.

Current view
Goldman says their thesis on EW has been that the market had not accurately captured the long-term earnings potential for transcatheter valves (TCV). In 2010, losses from investment in TCV mask the underlying earnings power of the business. Assuming $0.29 of losses on TCV in 2010, the base business would generate EPS of $2.14, growing at around 12%. Applying a 15X multiple to these earnings (1.25X PEG, consistent with group average) yields a base business valuation of $32. Therefore, they estimate that 41% of the current share price is related to TCV. Until they see further evidence to support clinical success, they think the upside will be limited, absent strategic activity. To be clear, Goldman says they are not making a call on the PARTNER trial data (to be presented in late September). In fact, the most recent data they have seen on TCV have been encouraging (European SOURCE data), although it may be hard to draw direct conclusions to the US study. They would become more constructive on evidence of share gains vs. Medtronic, additional clinical data, or a pull back in the stock.

Notablecalls: While purely based on valuation, this is kind of an interesting call from Goldman Sachs.

- Edwards Lifesciences has been a pioneer in developing better heart valves for open surgery. The stock has been a very nice performer over the past 10 yrs (up around 1,000%) and especially good one since 2008, up over 100% while the rest of the market tumbled.

- The strenght exhibited by EW over the past couple of years is mainly tied to a product called SAPIEN. It's a transcatheter heart valve that can be delivered through a small incision in the groin known as the “transfemoral approach,” the same approach that a surgeon would use, for instance, to implant a stent. Bascically, it's a minimally invasive approach to replacing damaged heart valves.

Today if someone has a valve that needs to be replaced, docs either open the chest or make smaller incisions in between the ribs. Nonetheless, it’s a 3- to 5-hour procedure and individuals will be in the hospital for five to seven days. And even though the success rate for these operations is very high for those who are over the age of 65, open-heart surgery is not the best option for many patients.

So, the SAPIEN has the potential to open up a whole new $1-3 billion market & Edwards would be the leading player. The device and a similar one from Medtronic (MDT) are approved in Europe and went from zero to multi-hundred million in revenues just in a couple of years.

In U.S. Edwards is expected to have a 2-year lead over Medtronic in launching SAPIEN. With the device carrying 80-90% gross margins, this one is bound to generate a lot of growth for the co.

- Most of the valve patients that receive these devices are elderly and are over the age of 65, and therefore qualify for Medicare. And since the government is paying for these procedures (~80% of them), there will be very little financial impact, even in case of an economical downturn.

This is another reason why investors have been flocking to Edwards. It's defensive.

- There have been constant chatters of Edwards being a takeover candidate.

With a $6bln+ market cap, there are only a handful of players that would be up to the challenge. Another reason why I think EW is not currently a takeover candidate is valuation. The thing is trading 15x EBITDA and around 30x EPS, which is sky-high.

Clearly, the market has baked in a lot of the future success of SAPIEN.

- While EW looks like to be a great defensive growth story, the valuation surely looks full. There are other names in the sector that have gotten hit recently, while EW has kept going up. Now we may see some roation - out of EW and into other names.

So the Goldman downgrade here makes at least some sense.

I would not be surprised to see EW down a couple of pts today, towards the $53 level & possibly lower.

Longer-term though, EW still looks like a keeper.

Friday, June 18, 2010

Amylin (NASDAQ:AMLN): Comments on Taspo

I don't normally comment on specific news but here is something I think you should be looking at today:

Roche Holding AG delayed development of the experimental diabetes drug taspoglutide by at least 12 to 18 months after more people than expected suffered from side effects such as skin reactions and digestive symptoms.


As many of you probably know, taspoglutide or Taspo has been considered one of the 3 newer glucagon-like peptide-1 (GLP-1) receptor agonist class medications to hit the market in recent years (type 2 diabetes). Taspo is or rather was expected to start competing with Novo-Nordisk's (NYSE:NVO) Victoza and Amylin's (NASDAQ:AMLN) Bydureon.

Now it looks like the drug will see a significant delay or won't be launched at all. That should be a significant positive for both NVO and AMLN.

As AMLN is way more leveraged to Bydureon's success, I think it warrants special attention today.

Note that Piper Jaffray upgraded Amylin (AMLN) to Overweight from Neutral on June 13 after American Diabetes Association abstracts showed that Bydureon had better safety data vs. Taspo.

This is what they had to say:

We are upgrading AMLN to Overweight from Neutral based on valuation and our belief that taspoglutide's profile and development timeline reduces the competitive threat to Bydureon. Since the April 9th highs, AMLN shares have pulled back ~30% (vs. S&P500 -8.6%) ahead of competitive taspo data at the ADA (June 25-29). On Friday, the ADA released abstracts for the Phase III taspoglutide (A1C reduction of 0.8%-1.3% but GI related dropout rate of ~5-14%) and Bydureon Phase III trials (A1C reduction of 1.5-1.9% and nausea and AE related dropout rates of 0.7% and 6%, respectively), which continue to support Bydureon's best in class profile.

Bydureon's profile combined with its two year lead time (taspo launch in 2H12) should offset its need to reconstitute and larger needle size and support peak sales estimates of $2bn. Our estimates for the exenatide franchise do not incorporate sales of once-monthly exenatide, which could launch in 2013.

How does taspoglutide compare to Bydureon? The Phase III taspo abstracts are largely in line with the Phase II results, with a 0.8%-1.3% reduction in A1C and weight loss of 2-4kg at 24 weeks. The A1C reductions are below similarly structured Phase III trials for Bydureon (1.5%-1.9% A1C reduction and 2-4kg weight loss). GI related discontinuation rates are also much higher with taspo, ranging from 5-14% of subjects on drug (vs. <0.7% style="color: rgb(255, 0, 0);">

Notablecalls: My thoughts regarding AMLN are the following:

- The stock went from $15.50 to $18.30 on the worse than expected Taspo data. The ADA abstracts were obviously leaked sometime in the morning of June 11 causing the stock to jump 1.5 pts ahead of the Piper Jaffray upgrade on June 12.

The stock ran another 1+ pt following the Piper upgrade but has given back about 50% of the advance over the past 3-4 days.

- Novo Nordisk (NVO), that has a market cap of around $48 billion is up over 3 pts (3.5%) this morning in reaction Taspo news.

Amylin (AMLN) has a market cap of $2.4 billion and is way more leveraged to Bydureon than Novo is to Victoza.

All in all, I think this sets AMLN for a nice pop. I think it can go to $17.50-18.00 today, if not higher.

Note that there has been some analyst chatter of Bydureon getting an early approval.

One to watch today!

Thursday, June 17, 2010

First Solar (NASDAQ:FSLR): Upgrading to Outperform - Credit Suisse

Credit Suisse is upgrading First Solar (NASDAQ:FSLR) to Outperform from Neutral with a $150 price target (prev. $110.20). They think the pull-back post earnings appropriately risked the Euro depreciation, but the upside in pricing in Q2/Q3 is not yet reflected in the stock.

Thesis: (i) Upside to estimates: Credit Suisse is raising their CY10 demand estimate from 12.7GW to 13.0GW (cons 10-11GW), strong demand should drive 1Q10 to 4Q10 price erosion < 13%, better than prior model at 17%. (ii) Risks to long-term margins diminishing. “Easy” cost reductions for c-Si namely poly price declines, outsourcing to China and vertical integration have mostly played out – this should stabilize FSLR’s LT margins from CY11. (iii) Long term growth prospects intact. 2011 may not be as bad as feared – German demand could remain strong at 5-6GW as we are closing in on retail grid parity and US demand generally could surprise positively. (iv) Execution: FSLR’s panel efficiencies should inflect meaningfully higher by 4Q10/1Q11.

Catalysts: Expect Intersolar-US to be the next catalyst for the space (July). Credit Suisse also expects that FSLR will at least reiterate its 2010 EPS guidance in its 2Q10 earnings call in July despite the recent declines in the Euro.

Valuation: Credit Suisse is raising their CY10 rev/EPS for FSLR from $2.6bb/$6.79 to $2.7bb/$7.53; street consensus is at $2.6bb/$6.93. For CY11, they are raising teir rev/EPS from $3.8bb/$7.34 to $3.8bb/$8.32. Firm's new price target of $150 represents a 20x multiple on CY10 EPS, consistent with the post-credit crisis NTM multiple of 20x for the stock.

It's a lenghty call (21 pages), so I will summarize some of the more important points:

Margins and pricing for FSLR in 2H10 & 2011

Despite a 10% cut in FiT in Germany on Jan 1 2010, solar panel prices for China based c- Si companies were flattish q/q (in Euro terms) in 1Q10. At the recent Intersolar conference in Munich, Credit Suisse's checks suggested China based c-Si companies are seeing panel pricing trend flat to slightly up q/q in 2Q10 and 3Q10 at ~€€ 1.35/watt in spite of another 16% cut expected in German FiT in July ’10. The possibility that pricing can remain flattish despite two large FiT cuts in Germany has puzzled investors. All too often, the knee jerk reaction tends to be to think that panel prices will take the brunt of price declines when there is a FiT cut in a particular market. However, the mechanics can be somewhat more complicated than that.

There are seven levels of the supply chain that are involved, all trying to capture their (un)fair share of profits from the value of a system. Credit Suisse thinks the investor, who is the end consumer of energy, has the least differentiated value proposition.

The investor in theory is indifferent to the fact that it is a solar installation – the investor is likely comparing alternatives to his money to invest in other activities besides solar. If you assume an 8% IRR is sufficient to attract investment capital, then they calculate that the investor can tolerate up to a €€ 62c/watt increase in system price and still choose to invest in the solar system.

The distributor is the next level in the value chain. Distributors today are earning 25% gross margins, which the firm thinks is significantly in excess of “normalized” gross margins. For example, ARW, a major tech disty, had average gross margins in the 10-15% range over the last 7 years. Thus there can be ~€€ 25c/watt of excess margin that can be squeezed from the distributor chain.

The module maker is the next level of the value chain. Increasingly, the module maker is also the cell and wafer maker. For example, if TSL sold panels at €€ 1.33/watt today, they would get a combined gross margin of €€ 13c + €€ 14c + €€ 13c for each step in the value chain, for a total of ~25-30% GM, which is indeed close to the gross margin for TSL. There can be some margins that the module player needs to give back – but will be a market driven process by which the module players negotiate that price decline with distys, also influenced by the IRRs negotiated by installers and investors.

In summary, while there are valid arguments as to why panel prices could collapse in 2011, there are also opposing arguments as to why it need not decline much more than 10%. For FSLR, Credit Suisse is assuming price declines of 13% from 1Q10 to 4Q10 in USD terms (and 12% in Euro terms) and another 7.5% q/q in 1Q11.

- Long term margin outlook stabilizing for FSLR

Competition with Chinese crystalline silicon based companies was the key reason Credit Suisse downgraded FSLR a year ago in 2Q09. While there are still risks, they note that the bulk of the poly price declines have already played out, as poly prices have already declined from $450/kg at peak in 2Q08 to $50-$55/kg today. There is still some residual risk that pricing drops – they expect to ~$40/kg, but clearly they do not have as much risk as the firm had a year ago for poly price declines. In addition, it appears that FSLR has managed to price its products almost at parity with China c-Si prices. One argument is that FSLR should get a lower price because of lower efficiencies (kWh/area) – however, note that European panel producers get a €€ 40c/watt premium today to Chinese panel prices – relatively speaking, FSLR’s prices are still at a discount. Also, FSLR’s panels produce more kWh/kW (~5-10% more) than poly c-Si, and are also more bankable, which can support a more stable pricing outlook.

Efficiency – the next frontier for cost reductions

Indeed as the c-Si companies start running out of ideas to lower cost, they have gradually started to talk more and more about investing in new technologies such as “selective emitter” to increase efficiencies.

LDK, JASCO, TSL, STP, YGE have all made comments re: making higher efficiency cells.

Credit Suisse does not think it is merely a coincidence that all these companies have rather abruptly started to talk about increasing efficiencies for PV panels. It is much more likely that the “easy cost reductions” are mostly done and will not help as much in 2011; opex does not yield itself well to savings on a per-watt basis as the market diversifies geographically;

While talking about higher efficiencies is a new fad for many c-Si companies, FSLR has consistently maintained that it can increase efficiencies for CdTe panels, to as much as 14% by 2014. However, FSLR’s actual panel efficiencies on the contrary have remained in the 10.8-11.0% range for the last 6 quarters. It is not that FSLR has not been trying to increase efficiencies – Credit Suisse thinks the company is rather waiting for a more opportune moment to bundle several efficiency improvement steps to release to production. They think that it is becoming increasingly likely that we see a 50bps efficiency improvement, at some point by the 4Q10-1Q11 timeframe. They think that FSLR is working on improvements to glass (transparency and light trapping), CdTe film performance, and contacts to CdTe.

Notablecalls: Well, this looks to be a fairly significant call from Credit Suisse's Solar Energy team:

- First Solar (FSLR) seems to be in a position to gain market share as poly prices eventually rebound & the co can start their own efficiency push.

Looking at the polysilicon market, prices are down 90% from their peak. I can say, based purely on experience that if something falls 90%, it's bound to bounce at some point. Makes me think if buying MEMC Electronic (WFR) is the prudent thing to do here...

- The situation in Europe (ex. Spain) does not look that terrible. Germany looks strong!

- The co can squeeze out higher margins from distys. That's not something that can happen overnight but is more of a gradual thing.

- Short interest stands at close to 25% and the stock is still down 30 pts from its recent highs.

All in all, I think FSLR can trade up today by as much as 4-5%, putting $123-125 levels in play.

PS: Did you see how Priceline.com (NASDAQ:PCLN) reacted to that Goldman Sachs upgrade (Buy, $240 tgt) yesterday? The thing went up 10+ pts. That's a tell!

Tuesday, June 15, 2010

BWA; TRW, JCI - Auto parts day

Today is Auto parts day, folks. Two tier-1 firms are out with significant calls on Autos & Auto-Related sectors:

- UBS is out with a lengthy note titled: "Which Technologies Will Benefit Most from Fuel Economy Regulation?" In this report, they have identified the lowest cost technologies needed to meet US fuel economy targets. Based on their analysis, they forecast that dual clutch transmissions (DCTs) and turbochargers will have the best growth prospects. The firm is raising their 2012 to 2014 EPS estimates for Borg Warner (NYSE:BWA) to reflect the outsized growth of these technologies.

Borg Warner (NYSE:BWA) is upgraded to Buy from Neutral with a $50 price target (prev. $50).

According to UBS, BWA currently has a 35% share in turbos and is the only global supplier of wet DCTs. Consequently, BWA’s organic growth should significantly exceed that of the industry. UBS forecasts that BWA’s sales will double in the next 4 years. By 2016, they forecast that the US DCT and gas turbocharger markets will grow to $1.9bn and $1.3bn respectively from almost nothing today.

One of the most cost effective means of improving fuel economy will be to downsize engines. Automakers can downsize engine and maintain fuel economy by adding direct injection and a turbocharger. A turbocharged four cylinder engine can get similar fuel economy to a V-6 engine. UBS believes that by 2016 18% of gas engines will be turbocharged. By 2020, they expect penetration to reach 25%. Each gas turbo costs about $440/vehicle, and therefore they estimate the turbocharger market will increase to $1.3bn by 2016 and $1.9bn to 2020.

The gasoline engine downsizing trend will also accelerate in Europe. VW said that in a few years it is likely that 90% of their gasoline engines would be turbocharged. Automakers like Fiat have plans to aggressively downsize engines. Fiat plans to offer a turbocharged two-cylinder engine in Europe.

Diesel mix mitigates European exposure. 57% of BWA’s 2009 sales were in Europe, and therefore BWA will clearly be impacted by the expected declines in European auto sales. European sales are expected to decline 15-20% in the second half of this year. Beyond 2010, UBS expects flat European sales with sales down 1% in 2011 and up 1% in 2012. Despite its high regional sales exposure, they believe that BWA will significantly outperform the European market. BWA is levered to the European diesel market since almost all diesels use turbochargers. Diesels significantly underperformed the market in 2009 as diesel penetration fell from 53% in 2008 to only 46% in 2009. This implied that diesel sales declined by 15% while total industry sales declined by only 2%. Q1 2010 diesel mix was 50%, and they expect diesel mix to continue to recover in 2010.

Raising EPS estimates. UBS is raising their 2012 to 2014 EPS estimates for BWA to reflect the projected outsized growth of DCTs and gas turbochargers. They are raising their 2012 EPS estimate from $3.75 to $3.80, their 2013 estimate from $4.60 to $4.85, and their 2014 EPS estimate from $5.15 to $5.40.

- Morgan Stanley is upgrading the Autos & Auto-Related sector to Attractive from In-Line.

According to the firm, these actions reflect positive catalysts in the form of a meaningful cyclical recovery in auto production as well as significantly lower break-even levels across the industry and higher levels of sustainable profitability driven by restructuring, capacity rationalization and higher utilization. They believe these positive factors outweigh concerns surrounding near-term macro outlook in Europe as well as anticipated FX and commodities headwinds, though these could temper margins in 2H10 from their current levels.

V-shaped SAAR recovery underway though we trim 2010 SAAR expectations on slower initial ramp
US SAAR has been running at approx. 11.2 mm units in 1H2010, which is slightly above the 4Q09 run rate of 10.9 mm. Despite the sequential improvement and the start of a V-shaped recovery, the pace of recovery in the SAAR has been a bit slower than Morgan Stanley had hoped reflecting the impact of adverse weather conditions and the Toyota recall related sales stoppage in Jan-Feb and the choppy nature of the economic recovery. Their leading indicator and the drivers of new vehicle sales that they track still point to strong new vehicle sales conditions implying a sharp recovery in the SAAR and they expect a run-rate of 13-13.5 mm in the second half of the year. However, the slower SAAR rate in 1H causes the firm to trim their full year 2010 SAAR estimate to 12.3 mm from 12.8 mm units. They continue to expect a 2011 SAAR of 14.5 mm units and 2012 SAAR of 15.5 mm units.

Production levels in NA have been running at elevated levels that have been large consistent with Morgan Stanley's above consensus expectations of production. However, they believe investor concerns about unsustainable levels of production driving operating leverage are overblown. Industry inventory levels are still low enough (47 days at the end of May vs. LT average of 65 days) to need restocking of about 400-500K units even at current selling rates. They also expect SAAR to meaningfully pick up through the rest of the year -- their 12.3 mm 2010 SAAR estimate implies a 13 mm SAAR for the remainder of 2010. This implies an NA production of approx. 8.7 mm for the remainder of the year (assuming 75% domestic assembled share of sales, CA+MX sales running at April levels for the rest of the year, 65 days of inventory at exit rate SAAR of 13 mm and exports of 150K units for the rest of year), bringing them to their total NA production forecast of 11.5 mm units. If SAAR were to run at current rates for the rest of the year, they expect production of approx. 11 mm units in NA.

The company specific comments:

- TRW Automotive (NYSE:TRW) is upgraded to Overweight from Equal-Weight with a $44 price target (prev. $30), representing 48% upside.

Morgan Stanley is raising EPS estimates to $3.75 from $2.15 for 2010 and $4.40 from $3.00 for 2011, which are 10-15% above consensus. They now see sustainable operating margins at TRW in the 7-9% range vs. their previous estimate of 5-6% and well above the historical high-watermark of <5%. This, coupled with a far stronger balance sheet (net debt/EBITDA at 1.2x in 1Q vs. historic 2-3x range), leaves TRW’s financial and growth position better than at any point in its history. Valuation is also one of the cheapest in the group at 6.8x 2011e.

- Johnson Controls (NYSE:JCI) is upgraded to Overweight from Equal-Weight with a $40 price target (prev. $36), representing 33% upside.

Morgan Stanley trims 2010 EPS on FX headwinds, but raises their estimates for sustainable margins in the out-years, which drives their DCF higher. They see potential for further upside in their model, if pace of a recovery in BE (where they are below mgmt. guidance) is faster than their conservative assumptions and if JCI converts on its letter of interest issued on May 21 to acquire the Electronics and Interiors businesses of Visteon, which could improve their competitive market position in China and unlock cost synergies in NA and Europe. JCI trades below its traditional historical valuation premium at 10.2x FY11 EPS (group 10.8x, hist. 14-15x), and 5.8x EV/2011 EBTIDA (group 5.1x, hist. 6-7x).

- Borg Warner (NYSE:BWA) estimates go to $2.40 from $1.80 for 2010 and $3.45 from $3.00 for 2011, which are 5-7% above consensus. Morgan Stanley notes their bull case for BWA seems to be playing out with turbo and DCT penetration growth enabling BWA to grow faster than industry growth rates and restructuring actions finally gaining traction. They continue to believe that BWA has one of the most comprehensive portfolios of green technology related to the IC engine . BWA’s recent acquisition of a diesel emissions supplier and significant YTD program wins including Ford’s 4-cylinder Ecoboost, further strengthen this position, in firm's view. BWA trades at discount to its traditional historical valuation premium at 10.9x FY11 EPS (group 10.8x, hist. 14-15x), and 4.6x EV/2011 EBTIDA (group 5.1x, hist. 6-7x).

Notablecalls: Uummmmm, these are some tasty calls!

Not too long ago the Auto parts sector was all the rage & I suspect these two calls from UBS and Morgan Stanley will revive the animal spirits once again.

Here are the ranges I see for these 3 stocks:

- BWA will be up by at least 5% today, putting $40.50 level in play.

- TRW is a big mover. I have repeatedly seen this one up 6-8% on calls less powerful than we have today from Morgan Stanley. This one can trade $33-34 today.

- JCI has gotten beaten up, so I think 5% is prudent here. It's not as big of a mover as the other 2 but given the general tape & the powerful call, I think it could do $29+ today.

Plenty of opportunity in these today, folks. Let's see how it works out.

Monday, June 14, 2010

JetBlue Airways (NASDAQ:JBLU): Gaining high-yield traffic traction; Upgrade JBLU to Buy - Merril Lynch/BAC

Merrill Lynch/BAC is upgrading JetBlue Airways (NASDAQ:JBLU) to Buy from Neutral with a $11 price target (prev. $6.50).

JBLU’s unit revenue gains have lagged the industry as a result of the carrier’s relatively lower exposure to the surge in high-yield business traffic and its push into new markets. Merrill believes that JBLU’s schedule strength in JFK will lead to continued improvement in New York business mix and that JBLU’s rising market share in Boston offers another opportunity to improve its high yield mix. First half headwinds (cutover to a new reservation system and JFK runway construction) are now behind the carrier, and JBLU’s cost pressures also ease in the second half.

They believe year-over-year earnings decline will cross over to increases in the second quarter, and they are doubling their second quarter estimate to $0.08 (partially due to better than expected May traffic results) as compared to $0.06 consensus and a year ago profit of $0.05. For the full year, Merrill is raising their 2010 estimate to $0.35 ($0.32 consensus) from $0.19 and their 2011 estimate to $0.60 ($0.52 consensus) from $0.37.

JBLU increasing penetration in top 25 markets
In their industry report released today, Merrill looked at the top 25 markets of each airline over the past decade to gauge whether an airline is becoming more or less relevant to its customer base over time. JetBlue had the top ranking in 13 of its top 25 markets as early as 2003, a remarkable feat for a start-up carrier. Moreover, JBLU’s share has steadily climbed throughout the decade owing to its schedule dominance in JFK and its superior service product. In 2009, JBLU had a leading share in 21 of its top 25 markets, in line with most legacy airlines, and its market share in its top 25 markets averaged 56%, up 10 pts over 5 years (by far the best performance in the sector). Similarly, average revenues in JBLU’s top 25 markets gained 27% from 2003 to 2009 (also the best performance in the sector).

In firm's view, JBLU’s dominant share has lifted its business mix despite JFK’s less attractive location. From 2003 to 2009, JBLU’s top 25 yields increased 22% as compared to an industry decline of 16%. Currently, JBLU’s share of Boston traffic is beginning to escalate as well. The combination of AMR’s and LCC’s cutbacks and JBLU’s 33% expansion will vault JBLU into a leading share of domestic traffic by year end. Given that JBLU operates out of the most conveniently located Boston airport, yields may respond more quickly than in New York

Broader base reduces risk
JBLU has broadened its revenue base even as it increases its existing market penetration. In 2003, JBLU derived 85% of the company’s revenues from its top 25 markets, making the airline highly vulnerable to competitive attack. Revenues from JBLU’s top 25 markets equaled 42% of revenues in 2009 and they expect concentration to drop below 40% in 2010. Low fare carriers are increasingly penetrating larger markets, and JetBlue’s top 25 markets gained 27% from 2003 to 2009, the best performance in the sector.

Valuation becomes more attractive normalizing for fleet
Multiples typically compress as airline progress through the cycle, but more so for legacy airlines than low fare carriers. Merrill's $11 price objective is consistent with past mid-cycle low fare multiples of 10X-12X pretax earnings. JBLU appears expensive on sales multiples, but not after adjusting for its 4.3 average fleet age. They estimate that JBLU will generate $0.40 per share of free cash flow in 2010 and $0.60 in 2011 despite growing capacity 6%-7%. Deferral of fleet modernization is boosting many airlines’ free cash flow, but JBLU’s free cash multiples look well below the industry average using sustainable levels of capital spending. They derive their $11 price objective by applying the following mid-cycle multiples to their 2011 estimates: 1.15X EV/Sales, 11X pretax earnings, 6X EV/EBITDA, 6.5X EV/EBITDAR, 10X FCF, and 15X Normalized FCF.

Emphasis on growth
JBLU management has historically emphasized growth even as returns deteriorated. After cutting capacity in 2008, investors became concerned in April when management announced the addition of 7 leased A320s this fall on top of the existing plan to buy 9 planes a year. While Merrill notes they would prefer management would err on the side of caution, they note that the retreat of legacy carriers in Boston does create a vacuum that could be quickly filled by other low fare airlines. In addition, JBLU can currently internally fund its capital spending and JBLU’s EBITDAR margins are amongst the industry leaders.

Notablecalls: I like this call:

- This is a new Street high target for JBLU, surpassing the former $10/share target by $1.

- The chart looks OK & the stock is looking to break new 52-week highs in the n-t.

- Note that Deutsche is out with a group initiation call on Airlines, initiating JBLU with a Buy rating and $8 target. After a relatively strong 2009 earnings performance was overshadowed by a Mar Q 2010 loss (driven by several one-off events), they think JetBlue's shares are ready for take-off as an improving fundamental backdrop should drive earnings growth and margin expansion particularly as we move into 2H 2010.

All in all, I think this call warrants attention today. Should trade up by at least 5%, putting $6.80 levels in play. Could go higher if resistance gets broken.

Friday, June 11, 2010

American Eagle Outfitters (NYSE:AEO) : Time To Close Eyes Again, and Buy Shares, Upgrading to Buy -Jefferies

Jefferies' Specialty Retail team is upgrading American Eagle Outfitters (NYSE:AEO) to Buy from Hold while raising their price target to $18 (prev. $15). Firm sees favorable upside/downside near +50% / -10%.

- Stepping Up To The Plate Again. In 2009 Jeffco notes they had a BUY call on AEO to reflect cheap valuation, fundies turning off a bottom and a still relevant brand. That call worked with shares up 80% LY. Then on 1/4/10, they downgraded to HOLD citing ambitious turnaround expectations by the market. Since then shares are down 30%. They now think bad news is priced in, earnings estimates are low enough and sentiment is too negative so they are upgrading back to BUY.

How It Plays Out. While 2Q results will be punk, it's already in the guidance, Street estimates and the stock. Inventory will be down by 3Q which should aid margins in 2H. Jeffco also believes cost cutting is coming in a big way, which will further aid margins. With earnings forecasts cut by the sell-side over the past several months, they think the negative earnings revision cycle is near an end which should move the stock off the lows.

Multiple Catalysts Ahead. They see many catalysts to lift AEO shares: 1) Inventories lowered to drive margin stability in 2H, 2) New design leadership having impact on 2H deliveries, 3) Potential comprehensive cost cutting program could be announced (signaled on 1Q CC), 4) Stock buybacks will likely accelerate further, 5) Potential special dividend or more dividend increases could be on table, and 6) Look for a largely neutral rated sell-side community to possibly upgrade shares later this year.

Finally Valuation Is Too Too Cheap To Ignore. Here are the stats: 1) Near 30% of market cap in cash, 2) P/E just above 10x on depressed earnings, 3) EV/EBITDA under 4x, 4) div yield near 3.5%, 5) FCF Yield near 10%. This puts valuation at one of cheapest in all of retail for a company with a real brand, real cash flow generation and really big cash war chest.

Jeffco has included some incredibly appetizing comments in their call:

1) EPS Estimates Have Been Cut

Street Estimates Revised Down To Prior Levels

Street estimates are back down after a rise in expectations earlier in the year. While earnings cuts are not severe at first blush, Jeffco notes the cuts are significant as earnings estimates have been on the rise at peer companies.

2) Cash Is King…Don’t Forget That:

Share repos likely accelerate. Company has repurchased nearly 6M shares YTD and has 24M (~11% of shares out) left under current authorization.

Dividends likely increase. On 6/9/10 company raised the dividend by 10% making the div yield near 3.5% or one of the highest in retail.

Jeffco notes they wouldn’t rule out a special dividend in the future too. Companies like HOTT (NR), LTD (rated Hold) and BKE (NR) announced special dividends in the last 12 months to deploy excess cash to shareholders.

With a near 10% FCF yield, they believe AEO will generate plenty of excess cash to disperse to shareholders.

3) Valuation is low

EV/EBITDA at ~3.5x is the lowest in retail on highly depressed fundamentals. If the stock price was to fall by 10% (Jeffco's downside case), EV/EBITDA would be close to eclipsing 3x cash flow.

In this sector, EV/EBITDA valuations usually bottom around 3x, are normalized around 6-7x and are high >10x. Based on these current valuations,they wouldn’t be surprised to see private equity entities take a look or activist investors begin to shake the trees.

Notablecalls: Ok, I have some comments on this one, both good & bad.

The bad:

- Jeffco's Randy Konik is the same analyst that made the uber-bullish & apparently uber ill-timed call on Abercrombie & Fitch (NYSE:ANF) back in April. Good thing he wasn't alone in this mess. Both Credit Suisse & Mrogan Stanley came out with positive comments soon after and sent their clients to the slaughterhouse (see archives for more colour).

- Reading the call, Konik is trying to leave us with the impression he upgraded AEO in 2009, giving his clients a 80%+ ride.

I'm sorry Randy for bringing this up, but you had a buy on AEO ever since 2008 (or maybe even longer). You rode the stock down from high $20's in 2007-2008 all the way to $7-8 in 2009. Your low target was $12 in 2009.

The good:

- AEO is cheap.

A week ago I spoke to a new NCN (Notable Calls Network) member that advises several hedge funds and he was getting bullish on AEO.

'These things tend to bottom out around 3x EV/EBITDA. It's almost impossible for these type of co's to go out of business if there is no excessive leverage. They reinvent themselves and you will get very nice returns buying at around current valuation. This is what the stupid long-only guys watch all day'

- Konik actually makes a fairly good case in AEO. The thing is cheap & has catalysts.

So, I think AEO has a good chance of trading up by 5-8% today, putting 13.50+ levels in play.

Tuesday, June 08, 2010

Embarrassed yet?

Notablecalls: No words.

Research is Motion (NASDAQ:RIMM): Some positive comments ahead of #'s

Research is Motion (NASDAQ:RIMM) is getting some surprisingly positive commentary ahead of its quarterly #'s due out on June 24.

- Credit Suisse is reiterating their Outperform rating and $100 target saying they retain their FY11/FY12 EPS estimates at $5.70/$6.35 which are 6% above consensus respectively and post recent share price weakness they find the current valuation compelling.

F1Q11 results on June 24 should be solid. For F1Q11, CSFB believes that with very low levels of inventory at Verizon heading into the quarter as well as continued strength at AT&T and internationally, overall, that volumes should be strong (they are looking for units of 11.4mn +9% qoq and +46% yoy and would see risks to the upside here). For ASP's the firm expects a decline of 2% qoq to $305 given recent currency moves offsetting the strength of the Bold 9700. Overall, we forecast F1Q revenues/EPS of $4.3bn/$1.34, inline with consensus.

Global volumes potentially still being underestimated. For FY11/FY12 they are looking for RIM to ship volumes of 51mn/62mn (+40%/+20% yoy unit growth) and still believe that there are risks to the upside here. In particular, CSFB believes that current industry smartphone estimates could prove conservative (they are at 230mn/293mn for 2010/2011 or growth of 35%/27%). In addition, they remain confident that RIM's global smartphone share is stable at around 20%, with NA declining (CSFB assumes that a CDMA iPhone will be launched in mid 2011) offset by international momentum from WE currently and then potentially from Asia Pacific over the next 12 months.

Valuation compelling. Trading on a P/E of 8.9x our current FY12 EPS, the firm believes valuation is compelling given a revenue/earnings CAGR of 21%/21% over FY10-FY12, sustainable margins (as services carrying GMs of over 80% rises in the mix from 13% in FY09 to 19% in FY12) and improving FCF conversion (90% over F3Q10-F4Q10).

- BMO Capital Markets reits their Outperform and $92 target on RIMM saying they expect a good quarter with international doing better than North America. Overall, they expect units to be slightly better than their model, with net adds roughly in line. BMO's checks indicate LatAm was once again the fastest-growing region, Europe was above plan for net adds/units despite the weak euro and the economic crisis, and net adds in North America were down Q/Q, although units in North America held up better.

They believe Verizon sell-through remained strong and the weak sell-in from the February quarter does appear to be inventory related. Overall, inventory at Verizon Wireless was down ~25%/$315M from 4Q09 to 1Q10, which is well more than normal. BMO estimates that Verizon's inventory was two million devices lower than typical levels.

Firm expects good guidance due to continued growth internationally as well as recent/upcoming device launches, helping North American results in 2QFY11. The upgrade to BlackBerry 6 and additional new devices should drive a strong holiday season. BMO believes AT&T’s new data plans will benefit RIM as more consumers opt for Smartphones with $15 data plans over Qwerty/Touch Feature Phones with$20-$30 data plans. This segment grew faster than Smartphones in 2009.

- On June 3, Hapoalim's team was out with some positive comments on RIMM saying they believe the Street is still underestimating the growth potential in smartphones, as well as RIM’s ability to hold/gain share, especially in international markets. THey also expect margins to hold firm longer than expected, which all add up to significant upside potential, and rising Street estimates. Firm believes the inverse scenario is still priced into RIMM shares, and urge investors to capitalize on this opportunity to grab a solid large-cap growth name at a discounted value price.

Comfortable with their above consensus estimates. Following their end of quarter checks at US based carriers, Hapoalim remains comfortable with their revenue and EPS estimates of $4.4Bn and $1.39 (versus Street $4.35Bn and $1.36 apples/apples) for RIM’s 1Q11 (May) quarter, as well a their our above consensus view for future quarters.Our US store checks suggest sequential share improvement for RIM. Firm's checks suggest average shelf space increased materially from last quarter, to 27% in May (weighted by carrier market share) from 24% in the February quarter and that most of the improved momentum occurred at Verizon, which was the trouble spot last quarter, and may prove to be a source of upside this quarter.

RIM the major outperformer on the pricing front during its May quarter. RIM’s average price to consumers increased 26% during the May quarter, based on checks. Other than Apple, whose prices remained constant, all other vendors materially increased discounting in the quarter, which suggests to us that demand for RIM products was solid and they likely gained share in the US overall.

Notablecalls: Well, RIMM is now down 10 pts since that Cowen downgrade (to Underperform) on May 20.

While I remain very skeptical of RIM's longer-term fate, given the increasing competition and market saturation, I think there may be a trade with an upside bias here.

If RIM can produce decent results and at least in-line guidance, the current valuation would certainly lend some upside.

Results are 2 weeks away, so adjust your risk accordingly.

PS: There are currently 35 Buy ratings on the Street, so I would expect bevy of reits into the #'s

First Solar (NASDAQ:FSLR): Elevated European CdTe Ban Risk - Hapoalim

Hapoalim Securities is out with a very negative on First Solar (NASDAQ:FSLR) lowering their target price on the name to $65 (prev. $95) while reiterating their Sell rating. According to the firm, First Solar may be banned from the European market by 2015 the latest.

- Based on Hapoalim's review of the updated RoHS draft documents published 12/14/09 & 1/6/10, they now believe CdTe modules have a finite life of 4-to-5.5yrs in Europe;

A new Annex (i.e., page 49 of RoHS Directive published by EU Parliament 12/14/09), has been added to the RoHS directive which specifically bans CdTe thin‐film PV panels after July 1, 2014. However, if FSLR applies for a temporary exemption extension 18 months (i.e., January 1, 2013) before the exemption expires, the commission will decided on a case-by-case basis if it will extend a grace period, which will not exceed 18 months after the expiry of the exemption.

What does this mean? Well, in short, in Hapoalim's view, this new Amendment to the RoHS directive (which did not exist before) implies the underlying technology supporting FSLR’s CdTe technology has a finite life of at least 4yrs, & at most 5.5yrs. Furthermore, adjustments to Amendment 11 added the text: “Exemptions from the prohibition for certain specific materials or components should be limited in their scope and time,” from “Exemptions from the prohibition for certain specific materials or components should be limited in their scope,” denoting that law makers in Europe are decisively looking to implement specific time limits on how long toxic materials are given a temporary pass.

Consequently, when considering: 1) the items highlighted above are public record, meaning they are not opinion, but rather suggested written European law, 2) until now, this information has gone largely unnoticed by FSLR’s RoHS risk disclosure in its 2009 10-K (see page 17 of 2009 10-K), investors, & Wall Street analysts, suggesting acute risk to FSLR’s long-term growth outlook/forward‐multiple as this information is more broadly understood, & 3) FSLR continues to make comments on l-term visibility thru 2015, implying no product viability risk, the firm believes the Street is currently factoring a 0% probability that FSLR’s modules get closed out of the European market (which represents ~80% of global solar demand, & 60%-70% of FSLR’s revs moving forward).

As such, after their review of the updated RoHS Directive & discussions with experts on this topic, crystallizing the subsequent implications for FSLR, the firm is adjusting their 6-month PT for FSLR lower to $65 from $90 (or 12.5x Hapoalim's CY10 EPS est. $5.27/share).

- Isn’t there a loophole that will allow FSLR to avert product extinction in Europe – after all, there is a 20% renewable energy target contained for member states in the 2009 Renewable Energy Directive?:

In short, Hapoalim believes the answer to this question is no. Why? Well, as clearly outlined in Article 5 (pages 10, 11, 12, & 13) of the Compromise package II on Exemptions for the RoHS directive published 1/6/10, only equipment in category 8 (i.e., medical devices) & category 9 (i.e., monitoring devices) will be given exemptions up to eight years; this amendment effectively closes any loophole available beyond the 4-to-5.5yr timeframe referenced above.

Furthermore, (i.e., Annex VIb found on page 14 of the Compromise package II on Exemptions for the RoHS directive), in the event FSLR seeks exemption from the RoHS directive, it must submit: “an analysis of possible alternative substances, materials or designs on a lifecycle basis, including, when available, information and peer-reviewed studies about independent research, and development activities by the applicant.” Consequently, when considering both c-Si PV modules, & thin-film modules that do not contain CdTe are both viable alternatives to CdTe panels (Hapoalim reminds their readers that, due to their higher efficiency, c-Si PV modules also require sig. less space than FSLR’s CdTe modules, meaning a much smaller footprint), the firm finds it hard to see a scenario where FSLR could make a compelling argument to further the life of its panels beyond the 4-to-5.5yr “life-line”. As such, as stressed above, they strongly question the val. multiple (i.e., long‐term growth outlook) investors are currently attributing to FSLR when considering many of them have not considered this as a prevailing risk to the company.

Notablecalls: Well, this is certainly a mess. My first instinct, after reading the Hapoalim call, was to find all the shorts available & short the heck out of First Solar as soon as possible. Yet, after some digging I'm not so sure anymore.

Consider the following:

- FSLR is down 50 pts from its April high of $152 & short interest stands around 20%+. J.P. Morgan is out this morning following their European Alt. Energy tour saing they encountered a couple of investors who remained bullish on the solar sector. In approximately 50 meetings with over 65 investors the firm only found two investors that remained bullish on the near- to mid-term investment outlook for solar energy stocks. Like J.P. Morgan, most buy side investors in Europe have a difficult time in being positive on solar PV given their expectation of significant decline in subsidies over the next two years.

It's worth noting that JPM itself remains Underweight most solar stocks, including SPWRA, WFR, FSLR, and ENER.

- Also, when you have a chance go & visit First Solar corporate website, go under PRESS CENTER (FAQ).

There you will find the following comments:

What is First Solar’s view on the European Parliament Environment Committee’s vote on RoHS, which took place on June 2, 2010?

We welcome the European Parliament Environment Committee’s decision to exclude renewable energies from the scope of RoHS. The exclusion is an encouraging step, and we hope that the Council will confirm the intention of the Commission and Parliament to exclude renewable energies from the scope of RoHS, which was designed for household electronics.

An exclusion from the scope of RoHS will ensure that renewables are not discriminated against and thus support the EU goals regarding climate change, renewable energy, and energy security.

For what it's worth, it looks like FSLR is at least trying to spin the June RoHS Directive change positively. I'm sure Hapoalim has a thing or two to say about this (they have called FSLR's bluff before).

All in all, the stuff Hapoalim has dug up looks & feels bad and is very likely to garner significant attention. The remaining holders may panic and we could have the stock down by 3-5 pts. But do consider that the stock is down a lot, has a big short interest, the sector is hated and the management is fairly promotional. They may step forward and issue press release rebuffing the potential impact of the RoHS Directive.

Thursday, June 03, 2010

American Capital (NASDAQ:ACAS): Concerns of Bankruptcy Filing Emerge, Downgrading To Sell - Stifel

Stifel is downgrading American Capital (NASDAQ:ACAS) to Sell from Hold due to their belief that the company will file bankruptcy based on disappointing bondholder vote numbers released yesterday. This could result in negative headline risk and increased risk that the terms of the transaction could become less favorable for equity shareholders.

Stifel's Take: ACAS released preliminary bondholder vote totals, which, in their view, were well below the required threshold to reach a restructuring agreement outside of bankruptcy. Firm believes the probability of bankruptcy has risen significantly, which could result in a $3-4 stock price as ACAS restructures its debt agreement in bankruptcy. While they believe the long-term value of ACAS post bankruptcy is still in the $5-$6 range, they believe the risks associated with navigating the bankruptcy process will likely pressure the stock’s valuation near term. In addition, given the large disagreement from public shareholders it is possible the terms of the debt could change in bankruptcy becoming less favorable for equity shareholders and potentially lower their long-term value estimate. As a result, Stifel believes the risk is meaningfully to the downside in the near term and we recommend investors Sell ACAS shares.

Event Summary: Yesterday, ACAS announced the initial bondholder vote on the restructuring of its debt and extended the solicitation period from June 1 to June 8. ACAS required bondholders to vote on two issues: 1) the restructuring of current bonds into the new debt structure (called the “Exchange Offer”); and 2) should the exchange offer be rejected would the bondholders agree to the same offer in bankruptcy court (called the “Standby Plan”).

The reason for the two votes is that the required vote for approval is significantly lower in bankruptcy than outside of bankruptcy.

In order to reach the agreement outside of bankruptcy the required vote is as follows:
1. 100% approval from the $1.4 billion of bank-owned debt.
2. 100% approval from the $400 million of private debt.
3. 85% approval from the $550 million of public debt.

Inside of bankruptcy the required approval vote is:
1. 66% approval from the $1.4 billion of bank-owned debt.
2. 66% approval from the $400 million of private debt.
3. 66% approval from the $550 million of public debt.

Based on the current public debt holder vote of only 7% approval with 77% of votes cast, there is no way the current plan will be approved outside of bankruptcy unless ACAS is able to get several large public bondholders to change their vote or ACAS agrees to change the terms of the agreement to make it more favorable to the bondholders, which would likely require another round of vote solicitations.

Notablecalls: Ouch, this looks like it will hurt ACAS today. The bondholders have little incentive to give anything to the equity holders & and was manifested by yesterday's late vote.

With Stifel calling for $3-4/share level, I think the stock will trade down towards $4.40-$4.50 today.

Oil Services & Equipment: Dead Cat or Signs of Clarity? - J.P. Morgan

J.P. Morgan is out with some comments on the Oil Services & Equipment names (HAL, SLB, RIG):

Following a remarkable two days of trading activity in the oil services sector, investors may be starting to sort out which horse they want to ride once the Gulf of Mexico disaster gets under control. Of course that hasn’t happened yet, but they feel the quick recovery in large cap service stocks sends a signal that investors feel more confident in this group than offshore drillers. Assuming BP’s latest efforts to curtail the oil flow are successful (yes, a big assumption), the firm would expect the group to rally as potential liabilities would then have a “bookend” in their view.

Halliburton leads the way (down and up). The violent decline in shares of HAL and subsequent recovery today highlights several key points: investors remain concerned about potential liability as one of the “spill stocks”, yet the impact from the six month Gulf moratorium is much less than many thought. JPM continues to believe Halliburton will not be found culpable in the Deepwater Horizon tragedy, backed up by managemant’s openness regarding their involvement in today’s conference call. Furthermore, management indicated that deepwater Gulf revenue was only about 4% of total (a bit higher than JPM 3% estimate), likely the reason behind the group’s rally this afternoon, as investors realized that large cap services has less exposure (but still could be material).

Concerned about the fate of offshore drillers. On the other hand, all the signs point negative for offshore drillers and JPM would expect to see more operators follow Cobalt in declaring force majeure. Many operators are looking to use this opportunity to negotiate considerably lower dayrates in the wake of this incident as the 6 month drilling moratorium could easily push into 2011. While they have already made adjustments to costs and utilization rates, they are now looking more closely at dayrates.

Transocean can’t catch a break. The only “spill stock” noticeably down today was RIG—the only cause they can point to are CDS spreads widening along with concerns on free cash flow in light of convertible debt obligations and falling dayrates. Defaulting on debt is highly unlikely in JPM's view, but this is one of the more emotional stocks right now alongside BP. If the leak is largely contained by the weekend, thre would expect shares to materially rally. But even then, they struggle to quantify potential liability … they don’t think it is zero.

Beware of Falling Dayrates
Of the five offshore drillers JPM covers, 17 floaters will be rolling over within the next 6 months without a new contract. This represents an average of 12% of the 142 floaters managed by their coverage group. Ensco has the highest percentage of rigs rolling over as the 7500 will be rolling over in September, representing 25% of the 4 ultra deepwater rigs the company currently has operating. The rest of the companies the firm covers have approximate 12% of their floater fleet rolling over without contacts in the next 6 months including Pride and Noble with 2 rigs each, Diamond with 4 rigs, and Transocean with 8 rigs.

The GOM rigs are an unknown, but could significantly add to supply
To further complicate matters, the 33 rigs that are currently drilling in the Gulf may need to be redeployed if the current drilling moratorium lasts longer than 6 months. Although JPM believes this is unlikely, some or all of the rigs currently in the Gulf may become free agents, similar to Diamond’s Ocean Monarch recently released by Cobalt drilling under force majeure on June 1st. Transocean has the most rigs operating in the Gulf with 14 out of its fleet of 73 (18%), while Ensco has the highest percentage as 3 of its 4 semisubmersibles are currently operating in the Gulf, followed by 6 (35%) of Noble's 17 floaters

In the near-term dayrates for the floating rig market will be pressured
Therefore, over the next 6 months it is possible to have a range of 20-50 rigs needing new contracts in the deepwater market. Although JPM believes additional deepwater work exists outside of the Gulf of Mexico, the addition influx of rigs over such a short time period will likely reduce rates for floaters below their already pessimistic view. They wouldn’t be surprised to see ultra deepwater dayrates below the $400k/day level for upcoming tenders

Stick with HAL and SLB, stay wary of the drillers. The diversity of large cap service companies is a strong investment consideration, while offshore drillers will be subject to falling dayrates exacerbated by Gulf weakness. At this time, JPM notes they have the most confidence in HAL and SLB, while BHI is looking more attractive. They stay on the sideline with RIG.

Notablecalls: Well, this is JPM's view. The market tends to be 2 steps ahead of the analyst community and so we have BP and RIG trading up 2pts+ this morning, seemingly on no news.

That's usually how it happens - Monday was purgatory for BP (& the rest of the offshore drillers) as Top Kill failed & Obama had a field day bashing the sector. Yet, BP is now ~10% higher from these levels.

It was the point from where it could only get better. At least in the short-term.