Friday, August 27, 2010

The Wal-Mart Cake

OK, so this is how the conversation went:

Wal-Mart Employee: "Hello 'dis be Walmarts. How can I hep you?"

Customer: "I would like to order a cake for a going away party this week."

Wal-mart Employee: "What chu wan un de cake?"

Customer: ''Best Wishes Suzanne,' and underneath that, 'We will miss you."

You can't fix stupid!!!!!

Sunpower (NASDAQ:SPWRA): Upgrade to Buy - Princeton Tech Research

Soleil's Princeton Tech Research is upgrading Sunpower (NASDAQ:SPWRA) to Buy from Hold with a $14 target (prev. $21), representing 40% upside.

With the shares of SunPower now trading at: 1) A discount to tangible book value of $10.70 per share; 2) One of the lowest EV-to-EBITDA multiples in the PV industry - 6X on their 2011 estimates) and 3) At its all-time low (SunPower's shares are now actually trading almost 45% below their November 2008 low), the firm believes the risk/reward profile in the stock is positive and are upgrading their rating to a Buy. Given the shift in SunPower's business mix toward that of an E&C (Engineering & Construction) company, Princeton is reducing their target EV-to-EBITDA multiple to 6X, and their target Price-to-Tangible Book Value to 1.3X. These take their target price to $14/share - roughly 40% upside from last night's closing price.

Waiting For Earnings - The management of SunPower, as is the case with several other PV companies with a large exposure to the downstream installation business, has pushed earnings expectation for 2010 deep into the back half of 2010. The company is now saying that it will realize roughly 80% of its earnings for 2010 in the fourth quarter. The lack of any significant level of real earnings through the first three quarters of the year - combined with the company's opaque business model and insanely complex GAAP/non-GAAP approach to reporting earnings - has decimated the company's share price this year. SunPower's shares are now down 58% year-to-date (vs. a 6% decline for the S&P 500). Princeton believes SunPower (and other large system developers) will see a surge in business in the fourth quarter - the earnings will come through as management is forecasting.

The firm has reduced both their 2010 estimates (from $1.30 to $1.03 per share) and their 2011 estimates (from $1.65 to $1.55 per share). Given:

Lack Of Visibility To SunPower's Business Model - The downstream installation business in the PV industry is inherently difficult for outsiders to track - an enormous multiplicity of projects; a relatively "soft" backlog; and a lack of a long track record render the downstream PV business almost un-analyzable to an outside; and

Opacity Of Segment Reporting - SunPower seems to go out of its way to bury the economics of their manufacturing operation as deeply as possible. The lack of disclosure in this regard reinforces the perception that the company is a high-cost producer within the PV industry;

Princeton notes they are first to admit that their earnings estimates for SunPower are little more than educated guesses, which are heavily, heavily dependent on management guidance. Nonetheless, they do know that 2010 is going to be a year of significant growth in global installations of PV systems (up more than 90% on our estimates - 14 GW vs. 7.3 GW in the prior year). They also know that other companies in the downstream installation business are anticipating the bulk of their project business to close in the fourth quarter of 2010. Given this (and management guidance for the third quarter) they have pushed the bulk of SunPower's earnings into the fourth quarter of the year. Their 2010 estimate is now below management's guidance of $1.35-1.65 per share. Given that roughly 90% of the company's earnings are going to come in one quarter - the fourth - the firm is going to err on the side of conservatism on their estimates.

SunPower's management has provided no guidance for 2011 at this point. They are assuming - given the company's large backlog of project business - that SunPower can increase revenues 25% in 2011 and essentially hold EBITDA margins flat in the 12.5-13.0% range.

Notablecalls: SPWRA is now trading at a discount to tangible book value (tangible book value was $10.70 per share on September 30th).

- The company is profitable.

- There's a 30%+ short interest in the name.

Princeton Tech Research is among the smarter operators in Solar space. If they tell to buy SPWRA here, people will take note. Ignore the $14 price target. It's mostly likely too conservative if Princeton's right.

Goes $10.50+ today barring a market crash.

I want fills around $10.30-.40 level.

Note that Raymond James is also upgrading SPWRA this morning, to OP from MP witha $12.50 target.

Wednesday, August 25, 2010

Corning (NYSE:GLW): Time To Be Early; Upgrading to Outperform

Oppenheimer is upgrading Corning (NYSE:GLW) to Outperform from Perform and introducing a $20 price target.

Firm notes their upgrade doesn't mean that they think the inventory correction rattling through the LCD supply chain is over. The most likely scenario is that it will endure another one to three months. Still, if prior inventory corrections are any indicator, this is the time to turn positive on GLW's shares, when fear of downward revisions is peaking and when potential upside scenarios--Gorilla Glass, an accelerated TV replacement cycle, solar, etc.--lie forgotten in the weeds. Even after trimming their FY10-11 estimates to reflect a fairly grim industry view, GLW shares look severely undervalued at current levels and poised for recovery.

The dramatic compression in Corning’s multiple—to 7.6x, at last check—appears to reflect growing investor concern that the inventory correction sweeping through the LCD supply chain could lead to major downward revisions to Corning’s EPS estimates. Oppenheimer believes this concern is overdone and that even in a very bad scenario—we don’t say worst case, because there’s no limit to how bad things can get—Corning can earn approximately $1.89 per share next year.

While $1.89 is ~10% below the Street’s consensus, it’s probably a bit better than a nightmare scenario that the downdraft in GLW’s shares would seem to portend. EPS of $1.89 would still imply a current valuation of 8.3x, below Corning’s recent normalized trading range of 9x-14x and a 30% discount to the S&P average of 11.3x.

- Investors may be understandably nervous about stepping into GLW before the end of the inventory correction is in sight. But it pays to be early. During the last inventory correction, GLW's shares bottomed a month before panel prices found a floor, two months before estimates bottomed, and 3.5 months before industry fundamentals began improving.

- Because inventory cycles are driven by herd psychology as much as by supply and demand, it's tough to know when fear of shortage will swing into fear of glut, and then back again. The 2H09 inventory build overshot its mark in 1H10, and the current correction could err in the other direction.

- Slightly more predictable, however, is investors' ability to discount these inventory corrections. During the cycles of 2006 and 2008, it took investors approximately 4 months to fully discount the inventory correction and to become inured to incremental downward revisions. Approximately 4 months have passed since investors began to sniff a top to the current cycle.

Also worth noting: in each of the last two corrections, the bad news was digested and a sustained share recovery began (points 3 in the chart below) well before the Street had finished cutting estimates (points 4 in the chart below) and before improved LCD panel pricing had begun testifying to improved industry fundamentals (points 5 in the chart below).

In short, while Opco's call is almost certainly early from a fundamental point of view (insofar as industry fundamentals will take a bit longer to improve), it may not be too early from a stock point of view.

- Moreover, the current correction is likely to be much less severe than the prior one. Fear in the supply chain is not running nearly as high as in 2H08-1H09. And, unlike the last cycle, glass maker inventories are exceptionally low, which should mitigate the pressure to dump product.

Notablecalls: I'd say Yair Reiner from Oppenheimer carries weight in the space. He turned cautious on the LCD Panel space back in February, downgrading both GLW & AUO saying demand would peter out in Q1.

February 23: When Things Are Too Good to Last, They Don't

And now he is reversing his call.

This LCD Panel cycle is closely tied major sports events like the soccer championship. Demand gets hyped up, estimates move up and once the event is in the rear-mirror, demand falls off from the elevated levels & everyone is oh-so-disappointed. After some months the cycle starts anew.

Same thing happening here.

I think GLW is a solid buy here. Goes to $16.25+ on this upgrade. It's not exactly a thin name so don't pay up too much in the pre market. Plenty of room to go long after the open.

Tuesday, August 10, 2010

Gone fishing...

Dear Readers,

It's been a while since my last vacation. I feel it's time.

I'm not exactly sure when I will be back. Hopefully in a couple of weeks.



PS: Tough mkt!

Navistar International (NYSE:NAV): Lowering target to $27 from $36, SELL - Morgan Joseph

Morgan Joseph's Charles E. Mitchell Rentschler is making a BOLD call on Navistar International (NYSE:NAV) lowering this target on the truck name to $27 from $36 while reiterating his Sell rating.

(Mind you, this is a $50 stock.)

Here are the details:

EGR Starts with "E" in Edsel
To the best of our knowledge, Navistar isn't making many more of its new engines than it was a couple of months ago. Using our trusty cars-in-the-parking lot "leading indicator" — we calculated last Friday (8/6/10) that there were 80-90 employees at the Huntsville MaxxForce 13-liter (actually 12.4) plant, which we believe translates into production of around 40 engines per day.

Our estimate triangulates with the Ward's report for July (the first month that NAV was bereft of 2007 CMI engines) of about 800, which also happens to suggest production of about 40 engines per day. This works out to an approximate 7% share of the Class 8 business, versus Navistar's share for all of 2009 of 28%, a dramatic decline that should leave Navistar shareholders wanting some explanation from management, in our view. If we allow that a quarter of last year's production was 15-liter (which NAV is not making now), this implies the company has actually lost about 67% of its 13-liter business (14/21).

Navistar's apparent significant market share loss is certainly not due to a decline in overall demand within the industry, which is strengthening (e.g., trade chatter is that Freightliner, belonging to Daimler-Benz, is sold out of its leading Cascadia model through the rest of 2010). But Navistar's loss could be the result of supply issues and/or quality problems; or it could be, as we believe, that truckers simply aren't buying the concept of EGR, which is inherently less fuel-efficient, not EPA-compliant, and not fully tested, in our opinion, and that it could experience serious warranty and reliability problems, in our view: In a word, an Edsel. We note that informed people in the industry we talk to (admittedly few have even seen a MaxxForce 13) are highly skeptical that it will fly.

Oh, to be Vertically-Integrated!
Almost everyone within the industry understands the urge to be vertically-integrated ("getting out of the nest"), which is, in our opinion, best done over time and with contingency plans, however...that's not the case with Navistar given there were no parallel paths or plans put in place, to our knowledge. Once all of the CMI 2007-certified engines were depleted, Navistar was on its own. SCR engines, with all of their paraphernalia, require far more truck-space and part-numbers. So, the SCR-ready tractor is substantially different from the EGR-ready tractor – meaning that it would take some time for Navistar to re-engineer its chassis to take SCR, if this is what Navistar chooses to do.

We understand, after speaking with one of our reputable industry sources, that, in fact, Cummins and Navistar are now jointly testing a Navistar ProStar truck with a Cummins SCR 15-liter (actually 14.9) diesel. The problem is, it was also suggested that it won't be ready for 4-6 months...after Navistar has agreed to this approach, which implies an effective start-time of around February 1, more or less, we think. But will Navistar's management actually do an about-face?

The Abyss, as an Alternative
If the company, on Tuesday, does not acknowledge it is peering into a gaping chasm as a result of its precipitous choice of EGR for 2010 engine technology, in our opinion, then all bets are off. Certainly, our estimates for 2010 and 20111 would be rendered "null and void." We'll try to divine the thrust of this scenario that afternoon, if necessary.

Rentschler's new estimates are for $0.50 for fiscal 3Q (ended 7/31) and $0.80 for fiscal 4Q (ending 10/31), revised down from $0.80 and $1.55, respectively, which translates into $1.95 for fiscal 2010 (down from $3.00 previously); he has also lowered his fiscal 2011 EPS estimate to $2.25, from $3.00 previously

The company has been guiding for $2.75-$3.25 for this year (no guidance provided, yet, for F2011), while the prevailing Street consensus is for F2010 EPS of $3.07 and F2011 EPS of $5.14.

These estimates assume Navistar stops building EGR motors ASAP and starts buying SCR engines from Cummins Inc. (CMI - $81.13 - NYSE; Buy), which suggests the company can begin to turn things around by February 1, 2011, or by Navistar's second fiscal quarter of next year.

Notablecalls: Once this call starts circling the desks, I think NAV will get hit.

Look at the chart.

Friday, August 06, 2010

Autodesk (NASDAQ:ADSK): Downgrade to Hold: Slowing Rate of Improvement Driven by EMEA - Jefferies

Jefferies is downgrading Autodesk (NASDAQ:ADKS) to Hold from Buy with a $31 price target (prev. $37).

Firm notes their recent channel work points to deceleration in EMEA, while North America remains strong. They are comfortable with their F2Q11 (July) ests and renewed Euro strength will help F3Q11 (October). But they think EPS revisions will moderate and the stock is unlikely to achieve a premium multiple under that scenario.

Key Points
Downgrading to HOLD as EMEA Trends Weaken. Jeffco's most recent survey/ checks point to some deteriorating demand in EMEA, while North American remains strong. EMEA is 40% of ADSK sales and therefore difficult to ignore. The data is not terrible, but it has paid to take note of inflections historically (e.g. negative in 01/08, positive in 07/09). Jefferies had also predicated their view on positive EPS revisions, which they now think will moderate.

No Change to F2Q11 Ests, Slight Raise to F3Q11 Given FX. Firm's survey work suggests 2% seq license growth for the July Q. After adj. for the April Q price change and for an est 3% negative seq impact from FX, their July ests remain broadly unchanged at rev/ NG EPS of $455M/ $0.26 vs Street at $456M/ $0.27 and guidance at $445-460M/ $0.25-0.28. Their survey suggests better sequential license for NA in F3Q11 vs a decline for EMEA, leading to a low single digit blended rate of growth. But at prevailing rates FX will add 1-2% to seq growth. As a result, they have bumped their October Q ests from $454M/ $0.29 to $468M/ $0.30 vs Street at $461M/ $0.29.

Improvement Trends are Moderating. Jefferies' channel survey data shows signs of moderation in the rate of change of improvement. LT growth expectations ticked down and around 1/2 the resellers saw improving overall demand trends versus 3/4 last survey.

Also Added Costs to FY12 to Reflect Merit Increases. They increased FY11 costs to reflect a small opex increase for merit payments that we think could be reinstated next year. This also modestly negatively impacts their FY11 EPS estimate and brings us more in-line with consensus on EPS.

Jeffco's $31PT (from $37) is based on the stock trading on 17X our FY12 (CY11) EV/NOPAT at the end of FY11 (CY10) plus $6 net cash/ share. This multiple is broadly in line with the multiple for their group, and is lower tha prior 20X as they now have lower conviction on upside surprises to EPS. Key risks include the pace of new license sales recovery and the need to increase costs as rev growth increases.

Notablecalls: Jeffco's Systems Software team has made some good calls on ADSK in the past (e.g. negative in 01/08, positive in 07/09), which leads me to think today's call will get some attention. The target cut is also fairly hefty.

Monday, August 02, 2010

Linear Tech (NASDAQ:LLTC): Don't Eat the Yellow Snow..

Some interesting comments in Semi land this morning:

- J.P. Morgan notes that on August 1, the SIA announced June monthly sales of $27.2 billion or a MoM increase of 13.1%, well below the average June MoM increase of 20.8% and well below their estimate of a 20.8% MoM increase or $29.0 billion. The three-month rolling average sales for April-June increased 42.6% YoY to $24.9 billion, below our estimate of $25.5 billion.

Weakness in June was broad based, with microprocessors, flash, and DSP chips exhibiting the lowest MoM revenue growth relative to their seasonal norms. As the figure below illustrates, JPM believes the 3 month rolling average YoY revenue growth in 2010 peaked in March at 60% and will trend down to a trough of 12% in December as the easy comps in 1Q10 go away.

Still cautious on semis – hide in defensive stocks. JPM continues to be cautious on semiconductor stocks as we are seeing several signs of softening demand for technology products across the globe. Their top pick continues to be Overweight rated Linear Technology (LLTC), firm's semiconductor “igloo”.

Not time to “buy semis because the downturn is already priced in.” JPM believes the semiconductor sector is exhibiting the classic first signs of a correction – lead times being reduced and bookings dropping. For the first time since the previous downturn, we are witnessing several instances of semiconductor companies missing estimates and/or lowering guidance. Since the downside to estimates during a downturn is usually underestimated, they do not believe the downturn is priced into semiconductor stocks.

- Amusingly, Merrill Lynch/BAC is out this morning trying to blow up JPM's "igloo" by downgrading Linear Tech (NASDAQ:LLTC) to Underperform from Neutral with a $30 price target (prev. $33).

Their cautious stance is predicated primarily on intermediate term risks in the industrial and auto segments, with our analysis suggesting a sizeable overshoot in shipments vs. true demand/consumption. Further, they see risk of commoditization of high end computing designs, a driver of recent and anticipated growth.

Overstaying its welcome at the Industrial party
Although late to the party, Linear has in recent qtrs benefited from the recovery in the industrial segment, with bookings in this segment (37% of total bookings) up 104% from the lows. The good news in Merrill's view ends here, as current bookings - at a level that is 23% above the prior qtrly peak run rate - represent an overshoot vs. actual demand as implied by global industrial production, with the latter only just about reverting to prior peak levels. Firm thinks this overshoot is the result of extended lead times and perceptions around capacity constraints. A mean reversion (and possibly an undershoot) is likely to compensate for this overshoot, thus setting the stage for an inventory correction in this segment in coming qtrs.

Autos poised to run out of gas
A similar story, they think, exists in the auto segment where orders seem to be well above levels supported by auto production trends. While we concede that some of this growth is driven by silicon content growth in autos (a secular theme) they view the discrepancy between Linear’s auto bookings and global auto production as too large to be simply attributed to content growth.

Reducing estimates
While Merrill expects an upward bias to near-term ests fueled in part by a continued inventory overshoot given supply constraints/extended lead times, they think the longer this dynamic persists the greater the risk to estimates. PO moves to $30 from $33 or 13x Merrill's CY11E EPS; their already sub consensus FY12 EPS est. also trickles lower.

- Baird's Semi team is downgrading a host of names (DIOD/FCS/ONNN/STM/TXN/MU) saying inflection point in lead times occured last week.

While remaining above normal, lead times at large worldwide distributors fell sharply last week for the first time this year. Baird's recent checks point to reduced back-end revenue outlooks for 3Q, lower visibility across the technology supply chain, along with ongoing reductions in component orders from tier-one PC OEMs

Baird's downgrade of several analog semiconductor companies reflects their belief falling lead times will lead not only to a steep fall in backlog, but also eventually to order cancellations which could impact 4Q10/1Q11.

Notablecalls: With Merrill pissing on JPM's igloo saying bookings are in for a big correction & Baird basically backing the same view, I think LLTC is a short.

As grand master Frank Zappa said: Don't Eat The Yellow Snow.

I would also keep the Baird downgrades on radar. Would short Texas Instruments (NYSE:TXN). This puppy is losing steam, it seems.