Thursday, December 15, 2011

Apple (NASDAQ:AAPL): US Survey Points to 40%+ iPhone and iPad Unit Upside - Morgan Stanley

Morgan Stanley, the uber bull in Apple (NASDAQ:AAPL) is out with some very positive comments on the name after completing their US consumer survey.

- The firm issues a positive Research Tactical Idea (RTI) on AAPL.

Their 3 key takeaways are:

* iPhone demand is tracking ahead of expectations in C4Q11. The survey points to 11-12 million US iPhone shipments in the December quarter, which translates to 31-36 million global shipments. This compares to Morgan Stanley estimate of 30 million and consensus estimate of 28 million.

* Surprisingly, US consumers expect to buy more iPhones in C1Q12 than in C4Q11. Even after applying a 10% discount to C1Q12 purchase intentions, the survey predicts 13 million US iPhone sales or 41 million global iPhone sales in the March quarter. For perspective, the firm currently models 28 million iPhone shipments in C1Q12, down 7% Q/Q. Given iPhone demand will benefit from more country and carrier rollouts next quarter, likely including China, the data bodes well for meaningful iPhone unit upside in early 2012. Applying the average iPhone seasonality over the past two years to C1Q12 shipments based on firm's survey implies 190 million iPhones in CY2012, roughly in-line with the 200 million production capacity Apple is asking suppliers to prepare.

* Perhaps most surprising, US tablet demand remains extremely strong despite recent data points regarding iPad production cuts and Corning’s negative pre-announcement pertaining to Gorilla glass. Only 8% of US consumers own a tablet today but 27% plan to buy one, according to the survey. This represents 63 million future purchases vs. 26.5 million tablets shipped over the past six quarters in the US. While Apple will give up a modest 4 points of share to Amazon’s Kindle Fire, the overall market growth puts upward pressure on their estimates. 13% of US consumers, or about 30 million people, plan to buy the iPad, which compares to about 16.8 million sold in the US to date and our global iPad forecast of 52 million in CY12 (roughly 20 million of which are US). Applying the recent US iPad mix of 37% to the US demand figure implies 81 million global iPad units next year, in-line with the 80 million production capacity Apple is asking suppliers to prepare.

Firm maintains Overweight rating and $480 PT on AAPL. Firm's Bull case stands at $600.

Notablecalls: This should clear some of that uncertainty created by Corning's (GLW) warning.

Would not be surprised to see AAPL move up on this in the n-t.

Tuesday, December 13, 2011

Diamond Foods (NASDAQ:DMND): Finally an End in Sight; Reiterating BUY - Keybanc

KeyBanc analyst Akshay Jagdale is 'pounding the table' on Diamond Foods (NASDAQ:DMND) this morning:

He reiterates his Buy rating and $76 price target on the name.

- Although we had hoped for the investigation to be completed earlier, we view the mid- February completion date as reasonable especially given the number of reputable firms involved in the investigation (Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP). We are glad to see a completion date, albeit a little later than we thought, because it removes uncertainty regarding timing. As far as the outcome of the investigation, our view remains unchanged. We continue to believe that the investigation will reveal that DMND has properly accounted for the various payments it makes to its growers. Furthermore, we continue to believe that the Pringles deal will go through. Regarding the latter, Procter & Gamble Co. (P&G) told us on December 12 that it was not surprised by DMND’s announcement to delay its 10Q filing and P&G remains committed to completing the Pringles deal.

- The mid-February completion date implies roughly three months from start to completion (investigation announced on November 1, outside firms engaged a week or so later). We believe the stock was weak today (December 12) because investors believe that three months is too long for an investigation that seems so straight forward. However, we point out that it took Green Mountain Coffee Roasters, Inc. (GMCR-NASDAQ) close to three months (80 days) to complete its internal investigation as well; GMCR started its audit committee review around September 20, 2010 and restated its financials on December 9, 2010.

- Robert Willens, a third-party consultant we hired in October, was not surprised by yesterday’s announcement. We assume the accuracy of Mr. Willens. Mr. Willens believes that the three-month time frame for the completion of the investigation is reasonable especially given that three very reputable firms are involved in the investigation. Furthermore, Mr. Willens continues to believe that the ongoing investigation will reveal that DMND has properly accounted for the various payments it makes to its growers and there is minimal risk of restatements related to payments to walnut growers. Regarding the risk of restatements, Mr. Willens notes, “The only thing, in my view, that could lead to a restatement is a finding that the contract has somehow been amended, superseded, or abrogated and that the accounting for the payments to the growers does not reflect the terms of the contract as so amended, superseded, or abrogated, in my view a highly unlikely occurrence.”

Regarding valuation, DMND’s stock is down 66% since September 20 (S&P500 is up approximately 3% over that period) owing entirely to a contraction in its 12-month forward PE, which has gone from 29.4x to 10.3x as of today's (December 12) close. At 10.3x NTM EPS (see Table 3), DMND trades at a 58% discount to its consumer growth
peers average of 24.4x and a 51% discount to its historical average PE of 20.9x (range of 8.7-31.9x)

Notablecalls: Jagdale caused a 50%+ move in DMND on Friday but the stock gave 2/3rd of it back yesterday after co announced the internal investigation would take 3 months to complete. Jagdale speculated on Friday the co would file its 10-Q on time, which of course did not happen.

Robert Willens, the 3rd party consultant does offer a compelling explanation for the delay: Lawyers. Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP.

Billable hours. The more the merrier. The go over every little piece of the puzzle with a fine tooth comb. That's how these guys operate.

DMND stock has been an easy target to knock down but I do think Friday's move is not something the shorts want to experience again.

The short interest in DMND is probably still in the 50% range.

I'm thinking another short squeeze coming. $35+? Anyone?

Friday, December 09, 2011

Sears Holdings (NYSE:SHLD): Worth $6? Imperial says so..

Imperial Capital, a little known shop is out with a big negative call on Sears Holdings (NYSE:SHLD) initiating the retailer with an Underperform and $6 price target.

- they are also initiating coverage on SHLD's notes.

Already Weak Financial Results Appear Overstated by Pension Funding Costs; Real Estate and Brand Franchise Value May Not Be Enough to Overcome Tired Retail Operations— Initiating Coverage with a HOLD Rating on the 6.625% Senior Secured Notes due 10/15/18 on Sufficient Tangible Asset Coverage, a SELL Rating on the Long-Dated Senior Notes, and an Underperform Rating on the Shares, with a $6 Price Target.

While the overriding valuation thesis on Sears, they believe, has been its real estate holdings and potentially undervalued leased locations, they think the company’s underfunded pension plan (including significant annual funding requirements) and recently rapidly deteriorating operating performance outweigh the ability to monetize those assets while continuing to operate the retail chains in their current form.

Comments on the common stock:

On an adjusted basis, we believe EBITDA should be viewed as materially lower, given significant, ongoing pension funding requirements. Sears’ EBITDA of $1.3bn in FY10 and $809mn for the LTM ended 10/29/11 does not consider cash pension and post-retirement funding costs of $316mn in FY10 and LTM of $386mn, we believe. We calculate that net adjusted EBITDA (adjusted for cash pension funding costs) was $1.017bn in FY10 and $423mn for LTM—for leverage of 8.2x through the 6.625s (compared to 4.3x before the adjustment) and 10.0x through the unsecured debt (versus 5.2x).

* Recent accelerating deterioration in financial performance is draining cash and will likely require more debt.

* Real estate assets and iconic brands (Craftsman, Kenmore, and DieHard) are not sufficient to overcome underperforming retail operations.

* Sears’ retail operating platforms have been hurt by underinvestment and poor execution while the competitive climate has intensified. Sears’ retail operations have continued to languish over the years— capital expenditures have been running at close to 1% (or less) of revenues compared to 2–3% of revenues for select comp companies such as Lowe’s, Home Depot, Target, and Wal-Mart. Furthermore, customers continue to find store-level staff unmotivated and poorly trained for the most part, according to our experience. In our opinion, customers may be further distanced from the brand due to store level staff not being adequately trained or motivated to provide a high level of service. Meanwhile, the competition continues to take market share.

* The midpoint share valuation in our sum-of-the-parts analysis is $6, thus providing the basis for our share price target. We are valuing Sears Holdings Corporation using a sum-of-the-parts analysis to delineate values for the stronger business segments, including Sears’ 80% stake in Orchard Supply Hardware Corporation (OSH) and catalog retailer Lands’ End. We also assume that the underperforming businesses have value to a strategic investor that is willing to acquire those businesses, invest in the store base and, successfully execute on a retailing strategy. Our midrange enterprise valuation is approximately $6.514bn, which is 11x our FY11 EBITDA estimate of $590.7, 32x our FY11 net adjusted EBITDA estimate of $203.7mn. After deducting $3.474bn of secured debt, $765.9mn of unsecured debt and the pension/post-retirement liability of $1.68bn, we estimate value to the equity of just $591.8mn, or $6 a share, down 91% from the current share price of $60.49. Accordingly, we are initiating coverage coverage with an Underperform rating on the common stock and with SELL ratings on the longer-dated unsecured bonds, which we think will likely trade down on further potential erosion in operating performance.

Notablecalls: Scatching note from Imperial Capital should send SHLD trading down in the n-t despite the already negative Street sentiment and 45% short interest. Note the $6 price target is a mid-point of targets. SHLD could have negative equity value, according to Imperial.

Today's special offer: Walk A Mile in Eddie Lampert's Shoes

Any takers?

Thought so.

I see it trading somewhere in the $50-55 range n-t.

Monday, December 05, 2011

Assured Guaranty (NYSE:AGO): Initiating with a BUY and $35 Target Price - BTIG

BTIG is initiating Assured Guaranty (NYSE:AGO) with a Buy and $35 price target.

Firm views Assured Guaranty's equity as deeply undervalued at current trading levels and anticipate that as the fears that have depressed its share price abate and the viability of its business model becomes more apparent, it will gravitate toward its intrinsic value. Consequently, they believe investors who can appreciate that Assured's risk profile is overstated, and that its ability to generate profitable new business is understated, could realize outsized returns.


While the headwinds Assured (AGO) faces – weakness in the U.S. municipal bond market and the budgetary pressures facing insured municipalities, residual RMBS positions, and exposure to troubled Eurozone countries – are not inconsequential, we believe the market grossly underestimates the company‟s ability to manage these risks. Moreover, we believe fears about these issues have caused many investors to overlook the opportunities AGO has before it as the only bond insurer that continues to write new business while achieving consistent profitability, as well as the benefits it may derive from additional mortgage put-back representation and warranty (R&W) settlements.

We are initiating coverage of Assured Guaranty with a BUY and a $35 price target which is based on a 0.75x multiple of the company's 2012E year-end stand-alone adjusted per share book value of $48.56. We believe some discount to adjusted book value is appropriate, for while we view the AGO'ss portfolio exposures as manageable, they nevertheless present the potential for some loss of value. AGO trades at 0.23x the company's 3Q11 adjusted per share book value.

We believe the market reacted appropriately in providing AGO'ss stock with a boost last week after Standard & Poor‟s announced that the company would maintain its vital „AA's rating, particularly when the company‟s ongoing efforts to boost capital appear to have given the rating staying power. However, we also believe that the stock price does not come close to reflecting what the removal of the rating overhang could mean for AGO as the only currently functioning monoline, and that last week's price action may presage much larger gains ahead.

While the size of the insured and insurable portion of the U.S. municipal bond market is much smaller than it had been prior to the credit crunch, AGO'ss former competitors have either filed for bankruptcy, been acquired, or are in some form of run-off mode. Consequently, AGO has a virtually unimpeded opportunity to increase its penetration of the U.S. public finance (based on new issue transactions) from the 13.3% share it reported in 3Q11. We believe S&P‟s bond-insurance ratings overhaul had a significant negative impact on new business origination in 2011 and it is reasonable to believe that the market – and AGO‟s volumes – could rebound meaningfully in 2012.

AGO during its 3Q11 conference call provided additional information on its exposure to troubled European countries, and the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in particular. The company's total exposure to the five countries is $3.2bn, including $2.2bn of exposure to Italy. The only Eurozone exposure not backed by a revenue-generating project is a $291mm exposure to the government of Greece. AGO does not believe that the current proposal for Greek debt restructuring, which calls for a “voluntary” 50% haircut, would trigger a loss payment since it is characterized as voluntary and is not binding on bondholders. In the event of a Greek default, AGO would be responsible only for the interest payments and final principal payments on the $291mm in debt. Given the long-dated nature of these exposures – the maturities are 2037 and 2057 – we believe the present value of this figure would be manageable for the company. To put this in perspective, AGO's 3Q11 operating income included the effect of lower risk-free rates used to discount losses of approximately $120mm in pre-tax loss expense.

We noted that AGO during 3Q11 repurchased 2mm shares of its stock for a total of $23mm even as concerns about S&P‟s new ratings criteria could impact its capital requirements. The company's ongoing efforts to improve its capital levels through commutations and terminations as well as purchases of wrapped securities and pursuit of R&W settlements could generate excess capital going forward. We believe a portion of this capital could be used for additional buybacks or returned to shareholders in the form of dividends.

Notablecalls: AGO looks like to be in the sweet spot for several reasons:

1) BTIG initiation last week caused a ~30% rally in MBIA (NYSE:MBI), another bond insurer.

2) AGO looks like a leveraged play on the PIIGS debt issue, which looks like could be resolved soon. Notice the yields on last Italian bond action? That's why the mkt has been going up.

3) This thing has been beaten down so hard it's prone to produce a big move.

I would expect a 20% move in AGO based on this, putting $13-13.50 levels in play, possible as soon as today.

Monday, November 28, 2011 (NASDAQ:YOKU): New ban on advertising during TV dramas a major positive (NASDAQ:YOKU) and other Chinese online-video stocks could be on fire today after news the State Administration of Radio, Film and Television (SARFT) is planning to request that all advertisements aired during TV dramas should be removed nationwide in 2012. The losses caused by this new policy could be in excess of Rmb20bn.

We have couple of firms out with comments:

- Mirae Asset, a HK based brokerage sees this as a major positive to online video companies, including YOKU, TUDO, SOHU and Baidu Qiyi. The firm estimates at least 15-20% of the lost Rmb20bn advertisement fees will flow to online video, with the remaining flowing to outdoor media.

According to iResearch, online video advertisements had a revenue run rate of Rmb1.3bn in 3Q11. In particular:

- While SARFT did not specifically ask to remove advertisements before and after the TV drama (pre-roll and postroll), these advertisements are not as effective as the ones during (mid-roll) the drama. Also, adding pre-roll or postroll inventory would dilute the existing advertisers’ right and reduce their effectiveness. Assistant director of Jiangsu Satellite TV has already confirmed that the mid-roll will not be shifted to pre-roll and post-roll.They believe other TV stations will follow Jiangsu;

- Coupled with SARFT’s earlier regulation for major satellite TV stations to limit the amount of entertainment programming that can be shown in 2012, the cancelled advertisements could find it difficult to shift to other

- Online video is the closest alternative to TV, while outdoor media could also benefit;

- Advertisers are currently planning their budgets for next year. The law came at the right time.

YOKU will be the major beneficiary because its market share has gained
Mirae estimates YOKU to get 40-50% of the incremental advertising spending in online video because YOKU’s has enough inventories to digest the advertisers’ demands. Baidu Qiyi has already added mid-roll advertising but YOKU hasn’t, which means it can now sell for a higher price.

YOKU’s aggressive investment strategy will pay off. In October, YOKU’s time spent market share within the top 15 (P2P and web combined) rose 2.3ppt to 17.3%, the fastest gainer in the month, while SOHU Video, TUDO and Baidu Qiyi lost ground. If only counting web, YOKU’s time market share increased to 34% in October from 29% in September.

In 2012, YOKU has secured 22 exclusive TV dramas. With YOKU’s overall utilization still in the mid 20%’s, the chance for it to further increase revenue growth is high.

YOKU is Mirae's #3 top pick in China’s Internet sector with a TP of US$31.5.

- Goldman Sachs' Catherine Leung views these proposed regulations as materially positive for online video in general and Youku (YOKU) in particular.

The proposed regulations coincide with mass adoption of online video, with Youku leading in user traffic and time spent.

The regulations would follow recent SARFT rules issued in late October limiting entertainment content (e.g. variety shows) and imposing some ad controls. For example, Xinhua has reported possible new regulations to further restrict the amount of prime-time entertainment content among satellite TV stations.

Leung reiterates Conviction Buy rating on YOKU.

Notablecalls: If Mirae estimates prove to be correct, the new SARFT rules could more than double China's online-video opportunity. With YOKU among the top-tier players, this could prove to be very beneficial for them.

Do note however that analyst consensus revenue #'s for 2012 already foresee a 100% growth rate. Nonetheless a material positive, as GSCO notes.

I'm thinking $17.50+, that's a 10%+ move.

Tuesday, November 22, 2011

Focus Media (NASDAQ:FMCN): The Waters are Clear - WEDGE PARTNERS

Quick note: Long term Focus Media (NASDAQ:FMCN) bull Juan Lin from Wedge Partners is out with some thoughtful comments on the name. . I've been on FMCN's case past 24 hrs so I'm posting for the sake of objectivity. Worth a read guys.

The Waters are Clear

Yesterday research firm Muddy Waters posted a report on Focus Media (FMCN) recommending a ‘strong sell’ on the stock based on an accusation of fraudulently reporting operating numbers and historical write-downs. We believe that most of the comments are based on historic events, misunderstandings of the business and has insufficient support to lead to the conclusion.

MW: FMCN has been fraudulently overstating the number of screens in its LCD network by approximately 50% – particularly in Tier I cities. FMCN claims to operate 178,382 screens, but the actual number in FMCN’s media kit is less than 120,000. This is similar to China MediaExpress Holdings, Inc. (OTC: CCME), which we reported is a fraud on February 3, 2011. We therefore question whether FMCN’s core LCD business is viable.

The LCD commercial network includes LCD TV screens and LCD digital poster frames. MW only counted LCD TV screens to accuse the company of fraudulently overstating the number of screens. The company sells to advertisers with detailed lists of buildings and numbers of screens in the building, who understand the difference.

FMCN also plans to ask a well-known global third party survey company to investigate the number of screens. The company will hopefully deliver the report in 2-3 weeks.

MW: Like Olympus, FMCN is significantly and deliberately overpaying for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005. These write-downs are equivalent to one-third of FMCN’s present enterprise value. FMCN’s overpayments include fraudulently booking at least six mobile handset advertising acquisitions that it never made. Olympus’s situation may explain why FMCN overpays for acquisitions. Olympus management has stated that Olympus deliberately overpaid for acquisitions in order to disguise losses on investments. Questions remain about whether individuals associated with these transactions also pocketed the money, and / or whether the acquisitions were really used to cover losses in Olympus’s seemingly robust core business.

We went through the time periods when Chinese outdoors media companies were having severe competition in expanding market share. In order to demonstrate consistent strong growth, Focus Media decided to make massive acquisitions through earn-out terms. The company had to sometimes pay a very high premium in order to stop competitors from issuing IPOs. Target Media, Frame Media and CGEN were the primary cases. We have talked to people in this industry and understand the acquisition of these entities were NOT fraudulent, although the acquisition of CGEN was a failure.

MW: FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration. We show that many of these write-downs are not justified. There are several possible nefarious reasons FMCN gives acquisitions away, including doing so may put FMCN’s problems beyond the reach of auditors.

The company used to have a bad strategy of expanding through acquisitions. Some of the acquisitions were unwise and not well assessed. The company learned from that lesson and has not made any further acquisitions in the last three years. The company disposed of all of the subsidiaries from 2009 to 2011 since Jason Jiang returned to the company in 2009. The focus on core business development has been proven to be successful. The company does not intend to make major acquisitions in the foreseeable future either.

The company indeed used to overpay for some of the acquisitions and decided to stop paying for the second and third payments due to the tough advertising environment in 2009 in order to maintain cash. The impairment of acquired companies is mainly due to such situations and also the write down the company had to take after the stock price dropped from $60 to $6. Other examples like Allyes and some media companies do not have a lot of assets apart from people, so the large impairment is also understandable once the operation is not going well and talent left the company.

Another reason for some impairment is due to the Shanghai Expo during which the Shanghai government prohibited outdoor advertising in certain ways in 2010.

MW: Sales of FMCN shares by insiders have netted them at least $1.7 billion since FMCN went public in 2005.

The shareholders mainly include early investors including Softbank, IDG, Goldman Sachs, and management of Target Media and Frame Media. More importantly, CEO Jason Jiang has not sold any shares since 2006; but, instead, increased his share of the company over time.

On its conference call this morning with investors, FMCN stated that it is talking to its law firm in deciding whether to file a lawsuit in responding to Muddy Waters’ ‘misleading report’. The company maintains its outlook for 25% top line growth for 2012, of which 20% is organic growth and 5% from the new interactive screen business, and has not yet seen any abnormal spending pattern from advertisers. Advertisers have also provided positive feedback to FMCN’s new interactive screen business. Additionally, the company plans to accelerate share its buyback plan due to the share price drop caused by the MW report.

While remaining concerned about the potential growth slowdown of next year’s advertising market due to the macroeconomic environment, we have learned that the digital out-of-home market has been evolving from 2008, and has become a strong substitute for TV advertising. Advertisers have been driven away from the TV platform by the price hike (over 30% annually) and have gradually dropped some low quality, local TV stations. Advertisers are shifting budget to outdoor digital platforms and online especially online video platforms. For outdoor platforms, those who can reach to end consumers, including Focus Media’s networks, in-store screen networks, in-cinema advertising networks, bus-stop posters and ad networks on transportation tools should see healthy growth.

Furthermore, the possibility of advertisers suddenly ceasing spending like what happened in late 2008 will unlikely happen either in 2011 or next year. We have seen the normal year-end advertising budget flush into various media platforms, and the current feedback from advertisers on outdoors advertising platform still indicates normal growth for next year.

Compared to Focus Media’s platform, which can provide sales campaign themed ads, we are more concerned about traditional billboard and brand advertising platforms such as AirMedia’s platform.

Notablecalls: The problem with FMCN doesn't seem to be related to their core business but rather related party transactions.

Monday, November 21, 2011

Sunday, November 20, 2011

Notable Calls on Twitter

As some of you may have noticed, I haven't been that active in posting over the past couple of months. This can partly be explained by lack of substantive calls and the overall tough trading environment but Twitter does have a major part to play.

It's just that cramming my thoughts into 140 character pings via Twitter has been so much more time effective than writing & editing long blog postings.

Oh, and I get to change my mind there!

Let me give you an example:

- Nov 17: (NYSE:CRM) issued worse than expected results, causing the stock to drop as low as $112 (prev. close $126.09) in after hours trading. The stock rebounded to $118 after management gave it their best shot to explain away the deferred revenue & billings miss on the conference call.

- Nov 18: After shifting through the overnight analyst commentary on (NYSE:CRM) I posted the following comments around 07:00 AM ET. The stock was trading at around $117.

$CRM - Every Tier-1 firm out defending (CRM) this AM following #'s. Sell side lovefest. It's down 9pts from close. Bounce?

$CRM - DBAB's Tom Ernst PT now $205, new Street high. 'Contracting optics obscure accelerating momentum' he says.

As you can see from the chart, the stock staged a 4 pt rebound in little over an hour as traders started playing the bounce.

- 08:37 AM ET however I posted the following:

$CRM - My fav girl in the business pings me ' Check out Difucci @ JPM', she says. I'm reading it, doesn't sound so hot.

$CRM - JPM's DiFucci notes CRM saw similar billings miss going into recession of ’08/09. Mngmt sounded very bullish at the time.

$CRM - ' the only good reason is that growth declined. Guidance implies similar growth rates.' Difucci says.

Definitely a game changer there. The comments from JPMorgan's John DiFucci would almost certainly hurt the stock. (She was right as usual).

- 09:14 After reading the full analyst note in detail I added:

$CRM - 'Most troubling is that new biz grwth dclned to 12% per our calc from 42% in the JulQ after 5 straight Qs of >55% growth,' JPM says

If you look at the chart the stock never really looked back after the JPM comments declining from $120 to as low as $114 right after open. That's a potential 6 pt gain on the short side.

The beauty of it all? I got to change my mind. That's not something I would get to do in the blog. At least not with such ease.

I will keep posting on the blog as some calls still need to be expressed in more detail. But do check out the Twitter thing. It's actually fairly.. er.. cool?

Friday, November 11, 2011

Bio-Reference Labs (NASDAQ:BRLI): Jefferies throws in the towel..

Bio-Reference Labs (NASDAQ:BRLI) a lab testing company currently under siege from short-sellers at appears to be losing Sell side analyst support this morning after Jefferies & Co decides to put their rating Under Review (prev. Hold).

- Jefferies analyst Arthur Henderson notes they expect BRLI shares to see increased pressure after a second short report, published on Thursday afternoon, criticized the company's business practices and the background of certain employees. While they have no reason to believe the company has done or is doing anything inappropriate or unethical, the firm believes the news will not be well received and could elicit scrutiny from regulators. Rating under review (from Hold).

The details:

The Street Sweeper strikes again. On Thursday afternoon, The Street Sweeper, an online research organization whose goal is "to uncover the dirty little secrets that investors need to know," released the second part of its investigation into BRLI's business practices. The report digs deeper into BRLI and discusses the alleged sordid background of a few current and former employees. As a reminder, the first report was issued on November 1st and raised concerns about the viability and sustainability of BRLI's earnings growth, which has been fueled in part by increased utilization of the company's GenPap test -- a sophisticated test allowing OB/GYNs to better screen and detect a wide range of organisms such as chlamydia, gonorrhea, syphilis, etc. That report also articulated concerns about the company's billing practices, its weak cash flows, and salesforce tactics.

A new overhang emerges for BRLI. The Street Sweeper report is definitely an eyeopener and could spook investors as well as draw the attention of regulators. While we have no reason or evidence to conclude that the company or its employees have done anything unethical or inappropriate, the allegations are poignant and could provide a meaningful overhang on BRLI shares.

Notablecalls: Well this is alarming. I expected a garden variety Sells side defense but not this.

With Henderson calling the Sweeper report an 'eyeopener with potential to draw regulatory attention' I would not be surprised to see the stock in free fall.

Note there's 28% short interest in the name.

Here are the reports:

Is Bio-Reference Laboratories as Healthy as It Seems?

Bio-Reference (BRLI): Loads of Dirty Laundry

Thursday, November 10, 2011

Actionable Call Alert: Green Mountain Coffee (NASDAQ:GMCR) - Bounce?

Geen Mountain Coffee (NASDAQ:GMCR) trading down 30%+ following results and guidance reported last night.

- Most analysts are defending the name.

- Canaccord analyst Scott Van Winkle highlights something I would like to share with you:

'...A bear would argue that our (positive) opinion is shaded by our rose colored glasses. Well, we heard people saying the exact same thing in the exact same situation in Hansen Natural (HANS : NASDAQ : $90.09 | HOLD) in May 2010. We remember this so clearly because the HANS correction last May was the greatest buying opportunity we have ever seem on a timing issue around a price increase and the greatest miss we have ever had as a sell-side analyst. HANS instituted a price increase in January 2010 that led to massive buying by distributors ahead of the increase and even though the company knew there was a channel load, it didn’t realize how significant the buy-ahead was. Sound familiar? The result was that HANS crushed Q4/2009 results and then missed the subsequent Q1/2010 estimates by an even wider margin than GMCR’s relatively modest miss last night. HANS shares plummeted from near $45 to as low as $25 intraday.

The stock plummeted on an apparent slowing. Yet, third-party data from the likes of Nielsen and IRI continued to show robust growth at point of sale. Sound familiar? GMCR just put up a figure that will lead some investors to think business is slowing. It isn’t, in our view, because the third-party data from the likes of Nielsen and IRI, but more importantly NPD on brewers, show continued growth and even accelerated growth of brewers. For those who follow consumer staples, we don’t need to remind you what happened next with HANS. It is obvious in hindsight. Growth continued, shipments caught back up to the sell-through data in the next quarter, and HANS went on an extended rally to close yesterday at $90.09 ($97.31 is the recent high). If you dumped HANS on the miss, you missed a triple. This may not sound familiar yet for GMCR, but we expect it will....'

Notablecalls: Just draw your own conclusions. Calling it Actionable Call Alert!

"History doesn't repeat itself, but it does rhyme."

-- Mark Twain

Wednesday, November 09, 2011

Dreamworks (NYSE:DWA): Renewed Optimism Creates Selling Opportunity – Downgrading To Sell, $12 PT - Janney

Janney's Tony Wible is dealing a potential death blow to Dreamworks Animation SKG (NYSE:DWA) downgrading the name to Sell from Hold while lowering his price target to Street low of $12.

According to Wible they are increasingly concerned about the decay in franchise film performance, the possible cannibalization from the NFLX deal, the weak open on Puss in Boots, and their diminished outlook on new IP films. These concerns are exacerbated by the steep decline in DWA's DVD sales, but is partly tempered by better international performance, the near term boost from NFLX catalog sales, strong non-film performance, and the potential for self distribution savings in 2013. On balance, Janney believes estimates will need to move lower and sees the risk/reward on the stock in favor of a Sell rating.


Downgrade on Spike and Optimism - We are downgrading DWA to Sell from Neutral, as we believe the street is too optimistic about the rebound prospects on Puss In Boots, which we believe is now trending towards a $135 million USBO ultimate (below our reduced expectations). The under performance leads us to question the prospects on DWA's future slate of new IP films. We are reducing our fair value to $12 based on the reduction in our estimates.

Lower Generic Expectations - We believe the generic $200 million USBO film will trend down to $175 million. While foreign performance has helped worldwide numbers, the high rental rates offset much of the benefit. Our reduction of Puss In Boots numbers and the reduction in new IP film estimates (Guardians, Croods, Turbo, Shadow) lead us to reduce our 2012 and 2013 EPS to $1.07 and $0.95 from $1.41 and $1.50, respectively.

Franchise Fatigue - The core of DWA's business has been under pressure as established franchises are decaying faster than expected while new IP films have yet to create new franchises. The company is still producing some of the highest grossing animated films but the relative weakness and the string of disappointments will likely cast more doubt over future releases. Mounting competition also stands to commoditize the value of DWA's IP.

DVD Doubts - The entire industry has seen weakness in disc sales. However, DWA's compression in DVD to Box office ratios have been higher than its peers, which we ascribe to its support of cheap rental services. While the new NFLX deal will provide incremental catalog revenue near term, this deal has the potential to cannibalize new release and catalog disc sales as the output deal launches in 2013.

Foreign Exchange - The recent strength in the USD could be another headwind for DWA, as it produces its films in USD but sees more than half its revenue from international markets. The high USD would essentially deprive DWA of high margin revenue. While P&A spend is a hedge, each DWA film is expected to be profitable so the hit to revenue will be greater than the expense offset. We would note there has been recent weakness in key Latin American currencies that are now trending between a 4% to 8% YOY headwind.

One Last Hurrah - Puss will likely rule the USBO for one final weekend and may gross between $25 to $35 million, which could fuel more bullish optimism. However, Puss's run is coming to a close as Happy Feet 2 launches next week.

Notablecalls: So who is Tony Wible from Janney you ask? The guy who nailed (or killed) Netflix.

- April 26, 2011: Headwinds Trump Momentum – Downgrading To SELL

- Oct 10, 2011: Upgrade to Hold

- Oct 25, 2011: Downgrade to SELL with $51 PT

And now it appears he is going after DWA with similar vigor, cutting PT and estimates way below Street.

This alone should send tremors down the holders' spines.

DWA should get hit after open and then drift down in the n-t, possibly below $18 level.

PS: I'm posting this around open.

Wednesday, November 02, 2011

Career Education Corp. (NASDAQ:CECO): Ugh..

Career Education Corp. (NASDAQ:CECO) literally shit the bed last night as the co issued a slew of announcements this evening, including 1) the resignation of CEO Gary McCullough, 2) an update on its internal investigation into placement rates, and 3) its third-quarter results (a week earlier than expected). Board chairman Steven Lesnick has been named CEO while the board conducts a search for a permanent replacement.

CECO revealed that 36 of its 49 ACICS-accredited Health Ed and Art & Design schools failed to meet minimum accreditation standards for its placement rates in 2010-2011.

I've seen 3 downgrades so far but I'm quite sure more will follow after the 8:30 AM ET conference call concludes:

- William Blair is lowering CECO to Underperform saying that given 1) the likelihood that estimates will come down a lot for 2012 and 2013, 2) the chance of a material fine/settlement could occur, and 3) visibility on a recovery in starts for every franchise but the international business, it is difficult to value (in other words where would the stock be a buy) the enterprise with traditional metrics. On a rough sum-of-the-parts basis, (no value for Health or A&D, $50 million to $150 million in legal liabilities or fines, and $300 million in teachout cash flow losses over 2 years at Health and A&D) they believe the stock is worth probably $10 and $12, but a lot of that value depends on what 2012 profits in the University segment are; hopefully they will get a better feel for that on Wednesday’s call.

- First Analysis cuts CECO to Underweight noting they believe the independent counsel has not yet completed its investigation into the company's other segments, suggesting additional issues may still be uncovered. AIU and CTU are regionally accredited and thus don't have to report placement-rate data to their accrediting body (the Higher Learning Commission), though they believe they have provided placement data to prospective students, potentially exposing them to other legal and regulatory risks if the data proves to have been inaccurate.

Firm expects Career Education's stock will trade down meaningfully today. However, given the difficult-to-quantify and potentially substantial nature of the issues noted above, they find it difficult to recommend even investors with a deep value focus take a meaningful position in the stock at present.

They believe other names in the sector may trade down as well as investors ask whether others could have similar issues. Firm reminds investors that many of the companies in their coverage universe are regionally accredited and don't purport to offer placement services, much less report placement rates to their accrediting bodies. (These include Apollo, American Public Education, Capella, Strayer, and institutions at non-covered companies Bridgepoint and Grand Canyon. DeVry University is also regionally accredited, and while it does provide graduate employment data to students, First Analysis is confident in DeVry's internal controls.) They also believe nationally accredited schools that have grown organically, such as ITT and UTI, have operational controls in place to prevent such issues. Finally, they note that while Career Education's announcement may provide another arrow for Senator Harkin's quiver in his campaign to further clamp down on the sector, the placement-rate question isn't a new one, and a hearing he held in September 2010 was on precisely this topic.

- Stifel cuts to Hold from Buy noting that while an earnings and enrollment miss in this very challenging environment is not shocking, their original Buy thesis was predicated on the sum of the parts being greater than the enterprise value, improving academic quality, and progress being made by a relative newer management team. While progress was made on several fronts, the board’s decision to accept the CEO’s resignation in light of recent allegations of inflated placement rates in the health care division suggest lacking integrity in disclosed metrics. As such the firm believes the stock will be in the state of limbo for the foreseeable future. They therefore feel compelled to move to the sidelines until the management situation is clarified/resolved.

- CSFB says they expect shares to face significant pressure this morning.

- Baird says they expect CECO to trade down today.

- Morgan Stanley notes they expect shares of CECO to decline sharply as investors come to terms with the CEO’s sudden departure, findings by outside counsel of improper placement practices, and pre-reported weak Q3 results. CECO has a history of accreditation issues and in the current environment, in which accrediting bodies have been under pressure to better police the industry, they do not expect this to be handled with leniency. Firm notes though that this issue appears to be CECO specific and while the whole group is likely to trade off, they would view this as a buying opportunity for companies with better records of regulatory compliance.

Notablecalls: Reading the PR, all I could think was 'is this going to single digits now?'

Utter clusterf*ck and this could get worse as the independent counsel completes its investigation. Note the 49 colleges investigated represent around 40% of CECO revenues. So there could be more to come.

CECO has 6 bucks of cash per share on the balance sheet, which should limit the downside to $9-10 level.

This could hurt the entire sector. It's unlikely CECO is alone in this with its placement issues.

Thursday, October 27, 2011

Acme Packet (NASDAQ:APKT): Positive checks on Tier-1 VoIP Platforms opportunity - Deutsche

Deutsche Bank's Wireless Eq. team is making an interesting call in Acme Packet (NASDAQ:APKT) saying their latest round of industry checks have meaningfully improved their conviction on the Tier-1 VoIP Platform deal consummation for Acme in Q4.

Further, their checks suggest potential for meaningful upside to Acme's runrate SBC business in Q4, especially from large enterprise SBC deal closures. The SBC pricing and competitive environment remains benign in firm's view, with no meaningful near-term share gains from Acme's competitors (Alcatel Lucent, Genband, Sonus, Cisco etc).

- Firm is adding APKT to their s-t Solar Buy List.

The details:

See upside to Q4 and FY12+ view
Lack of clarity from management regarding the pending Tier-1 VoIP platform award (management guiding to sometime in 1H Q4 for closure of the deal, versus confirming the deal closure, during last week's earnings call) has been a major overhang on the stock, with bears pointing to potential for growth moderation across multiple segments of Acme's business, in addition to potential for the VoIP deal to slip into FY12. We disagree with the bear-case thesis (playing out in the stock somewhat, at current levels) and instead articulate a bullish view on Acme's Q4 and on their FY12+ growth opportunities, based on our latest checks and our view of Acme's market leadership position in the SBC market. Even a slight upside to the $93 m Q4 consensus expectation is likely to be cheered by investors, given that it represents the company's ability to successfully carry $100 m quarters in FY12+ (from an operational and sales execution point of view).

Reiterate our Buy rating
We fundamentally believe that major initiatives such as: 1) carrier VoIP platforms; 2) enterprise SIP trunking; 3) IP session recording; 4) telco and cableco VoIP peering etc., are the next phase of growth opportunities for Acme. We see favorable risk/reward at current levels (stock implying a +20% FY12 growth rate versus our +28% estimate). We reiterate our Buy rating.

Notablecalls: APKT was the (the!) momentum name of 2010 and 2011 as it went from sub $10 to $85.

Now it has given back 2/3 of that in just 4-5 months as the market crumbled and shorts smelled blood in form of AT&T's VoIP platform delays.

The management did a terrible job explaining (or rather not explaining) the delays around last qtr, causing another 20% haircut in the stock price.

Yet now we have Brian Modoff from DBAB saying his intel points to AT&T contract coming through. Also, the SBC business appears to be running strong.

This is a gutsy call. He must know something.

The stock should move up. This could cause a 7-10% move in the n-t.

Friday, October 21, 2011

Actionable Call Alert: Green Mountain Coffee (NASDAQ:GMCR)

SunTrust analyst William Chappell is literally pounding the table on Green Mountain Coffee (NASDAQ:GMCR) saying short seller David Einhorn is utterly wrong with his short thesis on the stock.

- Firm strongly reiterates Buy and adds to Top Pick status with $120 price target.

Chappell notes that Einhorn used their research reports (without their permission) as the basis for his negative conference presentation against GMCR. The report was made publicly available on Wednesday and the firm has since had a chance to “dissect his dissection” of their positive investment thesis.

- While there were no surprises in the presentation, the analyst does want to address several errors and omissions in that report to clarify his case. First, they remain comfortable in their $9 EPS analysis vs. his $3.50 estimate. The major errors to his math come on the “profit to split” analysis in which he appears to double-count the packaging costs, and his assumption for 20% private label share in k-cups, a penetration level which we will explain below to be STATISTICALLY impossible. Suntrust also notes that neither their $9 estimate, nor his $3.50 estimate, include potential profits from the highly profitable away from home segment.

Here are couple of examples of Chappell's counter:

Questioning the Starbucks Economics (slides 32 to 37)—As GMCR has previously said, it will make the same penny profit per k-cup on its brands as it will on partnered brands such as SBUX and Dunkin’ Brands. According to the investor, SBUX has said that it will make 2/3 of the profit and GMCR will make 1/3 of the total profit on each cup which, for the sake of argument, we will assume is correct. The problem lies in the investor’s math. Based on slide 35 he indicated that the total potential profit to share (i.e. split 2/3 to 1/3) is $0.22/k-cup. However, his analysis includes the assumption that BOTH companies will be paying $0.15/k‐cup for packaging when, in fact, SBUX is paying GMCR for the packaging services. If we eliminate this double‐count and assume that the cost of packaging is closer to $0.04-$0.05 per k-cup (based on prior statements by GMCR), the total profit to split is closer to $0.33/cup. If we then say that GMCR only takes a 1/3 of that profit per cup it would equate to $0.11, which is in line with our prior math.

Before leaving this item, we point out that, in our opinion, SBUX needed the GMCR partnership. Over the past decade, consumers were able to purchase single serve SBUX coffee through Kraft’s Tassimo system. But consumers overwhelmingly chose GMCR’s Keurig system (70% + market share of single serve system) vs. Tassimo (6% share), despite not having the option of SBUX. Additionally, SBUX only holds a 7-8% market share of coffee sold at retail and has been looking for new ways (i.e. Via) to expand that share. Again, we believe SBUX will still make more than $0.20 per k-cup so we doubt it looks at this as a bad bargain.

Private Label 20% Share Statistically Impossible (slides 63 and 66)—The second major driver of his $3.50 estimate is the assumption that non‐licensed private label cups will account for 20% of the total k‐cups sold. This comes from a quote from a “beverage Industry expert”. First, there are NO beverage categories outside of water and milk in which private label consists of 20% of the market. Second, private label only accounts for 10% of coffee sold at grocery, a level that has not deviated more than 1% per year for the past 10 years. That means it would take at least a 10‐standard deviation move to get to 20%; statistically impossible in the next five years.

- Second, Suntrust believes the implication that the company may have committed some sort of accounting fraud is a form of double jeopardy. While they do not outright reject the statement of a disgruntled M-Block employee from a six month old shareholder lawsuit, this statement relates to sales made in December 2009 and neglects to mention that GMCR already restated its financial results for FY08, FY09 and FY10 after a thorough review of the accounting.

In short, Chappell remain as confident as ever in the GMCR story and has moved it to their Top Pick among the 21 stocks he covers.

Notablecalls: This seems big as SunTrust's Chappell is countering Einhorn's claims with solid info and numbers. Not your typical 'We believe blah..blah..blah' type of defend we tend to get from the sell side.

Moreover, Einhorn used their models to present his short case. It appears he may have been wrong.

The stock is down 47 pts from its Sept highs, half of that over the past 4 days as funds managers blew out the name not to look stupid.

Greenberg was on CNBC yesterday, which probably attracted the retail shorts. They will get squeezed today. Big time, I suspect.

Given the nature of GMCR I would not be surprised to see it up 6-7 pts on this, putting 74-75 levels in play.

The shorts will have hell of a time keeping this one down.

I'm call this one Actionable Call (trading) Alert!

Thursday, October 20, 2011

Baidu (NASDAQ:BIDU): Take profits after 1000% run - Goldman Sachs

Goldman Sachs is making a major call in Baidu (NASDAQ:BIDU) downgrading the name to Neutral from Buy with a $165 price target (prev. $175)

According to Goldman fears over a China hard landing and global recession have led to a broad de-rating of the Internet and Education sectors over the past month. Although the sector has already bounced off the early October lows, with their coverage universe up 19% over the past two weeks but still down 12% over the past one month, they believe that volatility and uneasy sentiment over the sustainability of the current rally is likely to persist.

Given concerns over China’s economic slowdown next year, investors’ focus has naturally transitioned to the 2012 outlook from near-term fundamentals, with the upcoming 3Q results season unlikely to be sufficient to sustain rallies in the stocks, in Goldman's view. While they believe a managed, soft landing is more likely than a hard landing, nevertheless the lack of visibility into 2012 will likely limit share price performance.


The stock is up 1021% since we upgraded it to Buy on Dec 15, 2008, versus the S&P500 up 41%. While we continue to view favorably Baidu’s improved quality of growth and immense revenue opportunity as e-commerce growth accelerates advertiser adoption, we believe that relative outperformance hereon could be difficult. We consider the weakening advertising environment, which could affect Baidu at the margin despite structural growth drivers from rising online and search advertising adoption, and search as (one of, if not the) highest-ROI advertising channel.

We believe Baidu could be continued to dogged by several concerns: 1) SME tightening concerns, based on reports of lending restrictions plus rising labor costs causing bankruptcies. Looking at Baidu’s top advertiser categories, we would think some segments such as machinery and business services would be more sensitive to the economic cycle and depend on more capital-intensive industries. 2) ecommerce ad spend slowdown. Our channel checks suggest that smaller e-commerce companies are moderating their advertising spend into 4Q11 and likely into 2012 in order to conserve cash, due to heated competition and volatile capital markets hindering fundraising activities.

Baidu will report 3Q11 results on Oct 27 after the market close. We believe risk-reward could be negative going into results, given the strong fundamental momentum the company has already enjoyed boosting near-term expectations, while visibility into 2012 remains limited (with Baidu actually having the lowest visibility among our covered advertising companies owing to its large SME customer base).

Notablecalls: This will likely hurt as Goldman has been one of the most vocal bulls in Baidu. They have played their hand very well and are now telling clients to cash in the chips.

What I like about this call is that the analyst is not pushing her views, but rather attempting to be quite objective. Acknowledging the risks. Saying reward here is not worth the risk. Saying sell ahead of #'s.

This is the type of call that creates selling pressure for days as large clients sell.

I'm thinking BIDU goes below $120 level, possibly towards $118-$119 on this in the n-t.

Wednesday, October 19, 2011

Range Resources (NYSE:RRC): Cut to SELL, takeover unlikely - Canaccord

Range Resources (NYSE:RRC) the recent high-flying Marcellus play is getting downgraded at Canaccord to SELL from Hold with a $60 price target (prev. $61)

According to Canaccord, over the past month, RRC has outperformed the sector by over 20% on apparent takeout speculation. They believe RRC reflects a ~30% buyout premium even though a buyout in their view seems increasingly unlikely. RRC trades at a 14x firms ’12 EBITDA estimate – an almost 140% premium to the sector.


As Range should spend ~60% beyond cash flow next year, we see little potential to accelerate value creation further within the current equity capitalization. The bull case is that the company’s assets are worth more in the hands of a better-capitalized enterprise.

However, we believe Marcellus activity is governed by infrastructure, not capital. In southwest Pennsylvania, limited ethane capacity should preclude further acceleration in liquids-rich production until ’14. In northeast Pennsylvania, a material increase in dry gas activity appears incompatible with the acute regional pipeline constraints.

In time, the Utica Shale is likely to compete with the Marcellus, further amplifying regional price degradation and infrastructure constraints. Based on our conversations, one reported suitor may already have too much on its plate given its previous Appalachian Basin acquisition. Additionally, that same reported buyer all but denied the talk.

Range should exhibit 3% production growth in ’11. Our ’12 production growth estimate of 43% is significantly above company guidance of 25-30%.

Notablecalls: RRC has been on tear of lately helped by all sorts of takeover rumours and results that revealed better than expected production.

The thing is up almost 50% from its Oct 4 low.

Now we have Canaccord throwing cold water on the takeover speculation saying potential suitors have already too much on their plates. It appears one one the suitors denied their interest outright.

Yet the thing trades like it's going to be taken over any moment now.

Don't get me wrong, RRC seems like a powerful Marcellus story that may have legs for the next 10 years. It's just that the stock may have gotten somewhat ahead of itself.

One to watch on the short side in the n-t. Could trade below $70 level once the fast money bails.

RRC has a history of doing secondary offerings so I wouldn't be surprised if we saw one with the stock so strong of late.

Wednesday, October 12, 2011

First Solar (NASDAQ:FSLR): Ticonderoga cuts to Sell with $40 PT

Ticonderoga's Paul Leming is making a very negative call on First Solar (NASDAQ:FSLR) downgrading the Solar leader to SELL from NEUTRAL with a $40 price target (prev. $117)

According to the analyst there will be acceleration into the downside in both pricing and volume expectations for the PV industry.


No Year-End Rally In Germany - Phoenix Solar yesterday announced sharply lower revenue expectations for 2011 and stated bluntly in their press release that "the hitherto expected year-end rally [in installations in Germany] does not appear to be materializing." Germany remains the single largest market in the world for PV - the lack of a fourth quarter surge in installations and the growing support for still further reductions in subsidies in Germany is devastating news for the PV industry in general and FSLR, in particular. Volume assumptions for 2012 are increasingly at risk.

Pricing Declines Accelerating - Pricing throughout PV value chain appears to be accelerating to the downside; consistent with: 1) Disappointing Q4 volumes; 2) Massive overcapacity throughout the value chain and 3) The reality that still weaker volumes in the seasonally soft first half of the year (2012) will soon become a reality in the industry. Thin-film module prices are now at or below 90 cents/watt - a level at which FSLR's module manufacturing is (at best) break-even after operating expenses (SG&A and R&D).

FSLR's Module Business Heading Into The Red - With the increasing likelihood that polysilicon contract prices will break $30/kg over the next nine months, we believe the most likely scenario for FSLR's earnings in 2012 is for their module business to lose money. The company's absurd segment reporting format (which has their downstream project business exactly break-even each an every quarter) completely hides from investors (and the IRS) where the company really makes its money. Transferring modules into their projects at realistic market prices would show a highly profitable project business (with the backlog of attractive projects largely flowing through the income statement by the end of 2012) and a - today - barely profitable module business.

Our 12-month price target of $40 per share is based on the company's shares trading at 10X its $4 of earnings power in 2013.

Notablecalls: This is the Street low target for FSLR. The chart looks like death. The call reads like death. This appears to be going lower.

I'm thinking $51-$52 in the n-t.

Tuesday, October 11, 2011

Aeropostale (NYSE:ARO): Actionable Call Alert!

Jefferies & Co star retail analyst Randal Konik is making a potentially very significant call in Aeropostale (NYSE:ARO) upgrading the teen retailer to Buy from Hold with a $20 price target (prev. $12).

The call is titled 'Upgrading to Buy: We've Seen This Movie Before & We Like the Ending'

Konik highlights 5 reasons why investors should be buying ARO shares here. Most importantly he believes ARO is currently in a similar position to Abercrombie & Fitch (ANF, $67.98, Buy) when the stock reached trough fundamentals back in early 2009. ANF has since seen a turnaround in its business and its stock increase ~165% (vs. S&P up 35%).


Fundamentals Should Improve. In 2011 ARO has seen slowing sales momentum, loss of market share and margin compression as the company lapped peak fundamentals and faced a tough competitive environment. However, we believe the company is now near trough fundamentals and will begin to see improvement in coming quarters as inventories come more in line with sales trends, ARO laps easier comps and some fashion issues are fixed.

We believe ARO margins are currently near trough levels at an estimated ~4% this year, and we expect margins will begin to improve in FY’13 for the following reasons:

1) ARO brings inventory more in line with sales.
2) Comps begin to improve as ARO cycles past easier compares.
3) ARO aims to correct some mistakes in the women’s business
through an improved color palette and fashion.
4) Sourcing cost inflation abates

This Company Is Not Going Away. We continue to believe that ARO's business model is intact and that the company will again prove to be a key teen brand. Further the company's balance sheet and cash flow remain strong despite the tough fundamentals today.

Aeropostale has some of the most productive stores in the specialty retail space. While the sales per square foot metric will be down this year vs. LY, we believe this very high level of productivity shows that the stores are in a cyclical slump, not a secular one.

Aeropostale currently has 5.2m fans on its Facebook page

Sentiment is Already Very Negative. ARO has significantly reduced its earnings outlook this year and the stock is down over 50% YTD (vs. S&P down 5%). Further, sentiment is very negative with short interest near 20% of the float and very few buy ratings on the stock.

Back in early 2009, investor sentiment around ANF was particularly negative. This is illustrated by the high short interest and low number buy ratings among sell side analysts. ANF’s short interest as a percentage of the float peaked at ~19% in April 2009 as investors viewed the brand as largely dead and the company’s long term story broken. Analyst sentiment was also quite negative for ANF with less than 30% buy ratings, ~60% hold ratings and over 10% sell ratings.

What We Expect Will Happen at ARO
Investor sentiment around ARO has become increasingly negative this year following multiple downward earnings revisions and slowing fundamentals. We believe many investors view the ARO story as broken (much like they did for ANF in 2009).

This is evidenced by ARO’s short interest as a percentage of the float which has been increasing and is currently at 16%. Analyst sentiment is also negative for ARO with only 20% buy ratings, over 60% hold ratings and almost 15% sell ratings.

Among our coverage universe, ARO’s buy ratio (defined as the number of buy ratings as a percentage of total ratings) is one of the lowest at 21%. This compares to the average Buy ratio among our group of over 50%.

Risk/Reward Now Compelling to the Upside. With the stock one of the worst performing in our coverage universe, we now see little downside risk and meaningful upside in the coming months as margins and top line begin to recover. As such, we view risk/reward as very attractive at current levels.

Notablecalls: I'm calling this one Actionable Call Alert.

Here are my reasons:

1) Konik has done a very good job in ARO. He cut the name to Underperform on Jan 3 when the stock was trading around $25. Straight down. He kept pounding it all the way, ending with a $12 price target in August.

He upgraded ARO to a Hold on August 16 saying ARO had played out to his thesis with significant top-line and margin erosion YTD.

2) Konik compares ARO to ANF in 2009. A wild ride. But he was right. So right.

3) The call reads well and short interest stands at 18% of float. Sentiment is uber-negative so it won't take much to light up the stock.

I don't see this thing stopping before it hits $13 in the n-t. I suggest you don't chase it too high in the pre market and watch for any pullbacks after open to buy.

Longer term? A potential double or more.

(PS: Posting this around open)

Wednesday, October 05, 2011

Notable Calls Network (NCN): AM, SFLY & CSCO

We have caught some interesting (and profitable!) situations at Notable Calls Network (NCN) in the past couple of days:

1) Shutterfly (NASDAQ:SFLY), American Greeting (NYSE:AM)

Apple announced yesterday at their iPhone 4GS event that they will be releasing an app for iOS devices, where users can create and mail 1 to 1 greeting cards.

- Around 1:28 PM ET a particularly sharp & knowledgeable NCN member hit me with the following remarks:

New iPhone, iPad app called "Cards" allows you to make cards to send to people. American Greetings (NYSE:AM) getting hit on this, Shutterfly (NASDAQ:SFLY) also. "SFLY might get killed on this, " he added.

I quickly blasted the comments to NCN. Here what's happened:

American Greetings (NYSE:AM) went from $18 to as low as $16 (2 pts)

Shutterfly (NASDAQ:SFLY) went from $39 to as low as $33.50 (5.5 pts)

Both trades had ample size to be taken.

- We also caught a couple of analyst defends in SFLY, as around 1:55 PM ET Morgan Keegan was out defense of the name saying Apple has been in the photo market for years with iLife and its latest app does not appear to challenge Shutterfly in events and occasions, design choice, or even on price. (Marked green on the chart)

As you can see that also delivered for us.

2) Cisco Systems (NASDAQ:CSCO)

- Around 10:33 AM ET a hedge fund manager primaly focused on technology sector pinged me with the following snippet:

WASHINGTON (Dow Jones)--A bipartisan pair of senators plans to introduce on Thursday a bill proposing a tax break for U.S. companies that bring home foreign profits.

"= CSCO, MSFT, AAPL," he added.

This made perfect sense. Cisco (NASDAQ:CSCO) buybacks! Offshore cash!

- Here's what happened: $0.50 move in CSCO.

Later a NCN member told me he got $0.20 on 150,000 shares from the call. That's $30,000 profit in one trade.

These are the things that make me smile.

This is how Notable Calls Network (NCN) works - sharing the flow. We catch them every day.

Want to be part of NCN?

It's easy. Just shoot me a brief email that includes a short description of yourself and your AOL nickname.

Please do note that contacts via IM are limited to people with:

- 3+ years of trading experience

- Access to quality research/analyst commentary

- Ability to generate and share (intraday) trading calls

I will not accept contacts from purely technically oriented traders, penny stock fans or people who have less than 3 years of experience in the field.

Monday, October 03, 2011 (NASDAQ:PCLN): Upgrade to Overweight at Morgan Stanley

Morgan Stanley's Internet team is taking a bold step and upgrading (NASDAQ:PCLN) to Overweight from Equal-Weight while establishing $650 price target.

Firm believes the market is incorrectly assuming that has limited growth potential in Europe and APAC due to escalating competition and macro weakness, providing investors with a compelling buying opportunity. Morgan Stanley is raising their estimates above consensus.

The details (in short):

European competitive advantage + secular tailwinds outweigh cyclical risk: Based on our checks, still provides the best value proposition to European hotels with the lowest commission rates and largest customer reach relative to competition. Additionally, is well positioned to benefit from the ongoing offline-to-online shift in European hotel bookings, which in our mind, outweighs cyclical risk. We model increasing its share of the European hotel market from ~8% in 2010 to ~18% in 2015.

Asia Pacific: a new opportunity: brings a unique value proposition to Asian hotels with its large European customer base, which local online travel agencies are unable to provide. Additionally, the recent appointment of Darren Huston as CEO of (former CEO of MSFT Japan) brings valuable knowledge on effective APAC marketing strategies. We are not modeling Priceline dominating the APAC market, but rather continuing its current growth trajectory, growing market share from ~1% in 2010 to ~5% in 2015.

Valuation: At current price levels, Priceline trades at 11.5x 2012e EV / EBITDA, a discount to Ctrip at 15x and Make My Trip at 30x. We believe Priceline’s multiple will expand closer to its Asian counterparts, as gains market share in Europe and Asia Pacific

Notablecalls: Big mo-mo names have been under pressure past days, possibly because of JAT liquidations. As one of the top guys on Notable Calls Network (NCN) notes PCLN has fallen too much too fast and is now getting a size upgrade & target.

PCLN is squeeze material. The market needs to cooperate of course.

Same goes for Netflix (NASDAQ:NFLX) which is getting +ve Research Tactical Idea (RTI) from Morgan Stanley.

"The TRIN closed at 3.89 which is a bit panicky, I think we can get a down to up on the day at some point", another trader notes.

Wednesday, September 28, 2011

Netflix (NASDAQ:NFLX): Subscriber Churn Stabilizing - Piper Jaffray

Piper Jaffray is out with some interesting comments on Netflix (NASDAQ:NFLX) this morning noting their 2nd Subscriber Survey shows churn stabilizing in late Sept.

- As a follow-up to their 350 subscriber survey in mid-August, they firm recently surveyed 250 Netflix subs to gauge subscriber behavior. The outcome of the survey, conducted on 9/19 (after the apology email from CEO Reed Hastings to subscribers announcing the Qwikster spin-off), was similar to the mid-Aug survey; however, the number of subs that expect to quit the service is now down to 10% from 15% previously.Piper believes their survey shows that subscriber cancellations are stabilizing after being higher than expected for the majority of Q3. While they continue to expect elevated churn over the next few quarters, the risk of a mass exodus appears to be moderating following their mid-Sept. survey.

Firm reiterates Overweight & $300 PT.

Here's the gist of it:

Couple of points:

1) People planning to quit Netflix is down to 10%.

2) People planning to move to Redbox is down from 56% to 42%.


Notablecalls: Why this is important? I hate to say it but if you look at Olson's mid-August survey closely enough, you will know why. The survey rather cleraly highlighted people's discontent towards the price hikes. It showed people planning to leave NFLX and join CSTR.

I remember arguing about it with a guy sitting next to me at the desk. We both knew the info was material but we didn't have the guts to go against the tape and short the name. What happened was NFLX went down and CSTR went up big. We looked (and felt!) like two putzes. That was August 17 and NFLX was trading around $240+.

Now we have the stock down $100+ pts and Olsen is saying monthly churn won't be as bad as the initial read suggested.

Will it be enough to produce a bounce in NFLX?

I don't know. The chart looks bad & AMZN is about to reveal their streaming service today @ 10:00 AM ET.

Gotta play this one by ear today. Could see $10+ upside, if people really pick it up.

Monday, September 26, 2011

Netflix (NASDAQ:NFLX): Upgrade to Buy at Merriman

Merriman's Eric Wold is upgrading his rating on Netflix (NASDAQ:NFLX) to Buy from Hold with a $155-175 valuation range.

The analyst notes they downgraded NFLX to Neutral on July 6, the shares have dropped 55% vs. a 15% decline in the S&P 500. At this point, they believe their near-term concerns are more than reflected in the valuation - which no longer gives Netflix credit for its industry positioning and long-term potential. Firm is upgrading NFLX to Buy in spite of the near-term headwinds as their downside 2012 EPS analysis still shows solid growth potential over 2011. They are making no changes to their estimates at this time and see upside to $155-175 using a P/E of 25-28x.

The details (in short):

Downside 2012 EPS scenario still shows growth. In our downside analysis for 2012, we come up with a potential range of $4.49-5.95. The midpoint of $5.22 still represents a solid 21% growth over our current 2011 EPS estimate of $4.33. Given the consensus range of $5.38-9.69, we believe it is apparent that there are numerous drivers that could push results either way. However, we believe our analysis shows a realistic downside scenario that should give investors comfort in Netflix's still strong industry position - and that 2012 solely represents a potential pause before strong margin/EPS growth resumes in 2013.

Starz savings could offset earnings pressures. During 2012 we see three main earnings headwinds that could potentially push EPS below current expectations: 1) migration of DVD-only subscribers; 2) international launch operating losses; and 3) competition causing upward pressure on SAC. However, we believe the $250M in 2012 content savings from the Starz cancellation gives management some wiggle room should they not find
alternative content (or choose not to spend the surplus).

Two biggest drivers firmly in control. At this point, we believe it is increasingly clear that the two biggest earnings drivers in 2012 - marketing and content spend - are firmly in management's control. This is key in that should spending on those two areas not generate positive results, we believe management could easily pull back the reins to maintain solid profitability by catering to existing subscribers instead of pushing to add new ones.

Division split more of a content decision. We understand some believe management's decision to split the streaming and DVD divisions is to better position the streaming division for a sale to a larger competitor. However, even though this may help to improve the sum-of-the-parts valuation multiples afforded by investors, we believe the larger driver was to aid in content negotiations with a smaller number of streaming subscribers driving cost discussions (i.e., lowering the cost) vs. the entire pie (including DVD-only subscribers).

Near-term risks remain in spite of upgrade. Our decision to upgrade to Buy from Neutral today is not based on any improving outlook for the near-term and continue to see risk in subscriber trends through yearend. Furthermore, based on our EPS analysis, we believe there is a morethan- likely chance that 2012 consensus estimates (and possibly our belowconsensus estimate) may need to be reduced. Nevertheless, we believe NFLX shares already more than reflect these risks and should our downside analysis prove aggressive, we could see the shares rebound sharply in 2012 on an improved growth/margin outlook.

Notablecalls: Eric Wold nailed it on July 6th when he downgraded NFLX to a Hold from Buy saying the co would be entering a period of restrained operating margins.

He played the name so well on the way up and looks like he played it even better on the way down. Some of this performance can surely be attributed to blind luck (at least ONE of the analysts among many should get it right) but I do like his style. As was the case with the downgrade, Wold is not being pushy but rather pointing out things may not be as bad as the market suggests. According to Wold, 2012 may bring a sharp bounce-back.

Another thing that caught my eye this morning is that the analyst community is not overly excited about the DISH movie streaming package. It appears to cost more and have way less content that the NFLX offering. So n-t overhang lifted there.

(Now we can all go on and start worrying about what AMZN will unveil in 2 days).

Anyway, I wouldn't be surprised to see the stock lift following the Merriman upgrade. Hopefully another brilliant call for Eric Wold.

Give Kudos when it's due. I do!