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!

Wednesday, September 21, 2011

Autodesk (NASDAQ:ADSK): Actionable Call Alert!

J.P. Morgan's Software team is flip-flopping some names under their coverage this morning:

- ADSK, ROVI get upgraded to Overweight while VRSN and DOX are cut to Neutral.

I want to focus on Autodesk (NASDAQ:ADSK). JPM is upgrading the name to Overweight from Neutral with a $40 price target.

According to the firm, ADSK is one of the best franchises in their coverage. It has a substantial market share in a couple of key industry segments (AEC and Infrastructure) and is very competitive in manufacturing design software. The business is highly cyclical and they missed two other good entry points during the downturn in February of 2009 and July of 2010. They believe investors should take advantage of the cyclical pullbacks to build positions in what they consider a high quality software franchise. In addition, this next cycle has the potential added benefit of a move into product suites, a strategy that has helped companies like Adobe breathe large new growth opportunities into its business and something they think could underpin at least a 12% top line CAGR for ADSK over the next five years.

The details (in short):

Move to suites should provide at least 12% CAGR over 5 year horizon
Over the years we have watched a couple of software companies move from offering just point products to bundles of products to ultimately product suites that tightly integrate solutions and at attractive combined pricing. The first most notable company to follow this strategy is Microsoft with the Office suite, but we believe the best comparison for Autodesk is Adobe and its move to suites.

We went back and looked at the penetration rates of suites for Adobe and the impact on revenue and applied this to Autodesk. Result is that we see a base of 12% revenue CAGR over the next five years. Reason we say a base is that we lack perfect insight into the user base at Autodesk for products like Revit where we think there is potential to add another 3-4% to the revenue growth. But we think this view of Autodesk suite opportunity is very interesting given it is based on another software company with a very loyal customer base in Adobe.

Recent market action sets a range in our mind where the stock we think offers $12 of upside if the economy improves against the risk of $4-5 of downside if the economy worsens.

Notablecalls: JPM picked a (very) good day to upgrade ADSK as the August Architectural Billings Index (ABI) published last night showed a surprising jump.

The Architectural Billings Index (ABI) is a survey by the American Institute of Architects (AIA) and is viewed as a leading indicator of nonresidential construction activity. A score of 50 or above indicates an increase in billings. The AIA believes the index has a correlation with nonresidential construction spending 9-12 months into the future.

ADSK is one of the leading providers of software used by architects and engineers. If AutoCAD means anything to you, you're on the right tracks.

In a bit of a shocker, the ABI spiked higher in Aug. The index jumped 6.3 pts from 45.1 to 51.4. That's the biggest m/m change in 5 years (Aug '06). "Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise," said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. "Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it's possible we've reached the bottom of the down cycle."

Here's an illustration from Morgan Stanley explaining why ADSK shareholders track the ABI index:

So there you have it. JPM upgrade and an explosive move in the ABI index should get ADSK moving. The stock should trade towards $30 level in the n-t, possibly surpassing it if the tape holds.

Let's see how it goes. I'm going to call this one Actionable Call Alert!

(PS: I'm posting this right around open)

Monday, September 19, 2011

Mckesson (NYSE:MCK): Rapid Profit Expansion Expected Near Term; Upgrading Cardinal and McKesson to BUY - Citigroup

Citigroup's Health Care Distribution & Technology is making a fairly big call upgrading both Mckesson (NYSE:MCK) and Cardinal Health (NYSE:CAH) to Buy from Hold.

- Mckesson is added to Citi's Top Picks Live (TPL) list with a $101 price target (up from $90).

New Generic Introductions Should Provide Outsized Profits in C2012 – In the report, Citi examines the upcoming branded to generics wave set to impact the drug distributors beginning in 2011 though the end of 2015. They look at 100+ drugs that currently generate about $90 billion in revenue and their impact on wholesaler profits and margins. Firm estimates that the branded to generic conversion wave will lead to outsized profits and sustainable higher margins for the wholesalers.

The details:

Industry Top Lines Should Begin to Shrink in C2012 – One dynamic of the branded to generic drug conversion cycle is that wholesaler top lines should begin to decrease in 2012. Single source generic drugs can sell at about half the reference drug price and we believe many large customers will buy these generics direct, leading to significant leakage out of the wholesaling channel. We estimate that wholesaler revenue levels could shrink 2% to 8% in the 2012/2013 time period on a reported basis and 5% to 10% on a like for like basis, excluding acquisitions and nondrug distribution businesses.

But Gross Profits Should Expand on Mix – Within the customer base that buys generics from the wholesalers, generic drugs can be 3x to 20x as profitable as their branded drug counterparts. This should lead to both absolute higher profit levels and higher margins for the wholesalers reflecting the shifting mix to generics as a higher percentage of total drugs sold. About 50% of generic drugs dispensed in the U.S. are bought by retailers (or mail order) directly from the manufacturer, meaning the wholesalers will share the generic profit opportunity with other parts of the channel.

Difficult Comparisons Begin in 2H-2013 – We believe an underappreciated dynamic of the branded to generic conversion is the level of profits contributed by single or dual source generics, compared to multisource generics. These limited source generics can produce dollar profit levels that are 3-4x the multisource equivalent. So as many of these drugs move through their life cycles to multisource competition, the gross profit contribution from these drugs will decrease substantially. This should create difficult comparisons in 2013, as drugs including Lipitor, Lexapro, Seroquel, Plavix and Singular should all see multisource generic competition.

Upgrading Cardinal Health and McKesson to Buy, Maintain Hold on AmerisourceBergen – Our revisions make us at or near the Street High estimates on both companies for their F2012 and F2013, implying significant positive revisions which should lead to multiple expansion from current levels. Our target price on CAH goes to $51 from $44 and our target price on MCK is now $101 from $90.

Notablecalls: My poison of choice here would be MCK, as the name is added to the TPL with a very nice $101 price target.

What really makes the call interesting are the catalysts:

- Lipitor is going to launch in Nov 2011, that's 45 days from here. It's the largest drug in the world by sales which should create some excitement among investors.

- McKesson benefits when UNH brings PBM business in house. Of course that won't happen til 2013.

It's a 54 pg. note so the good people at Citi have put work into the subject. The sales will be making a lot of calls today pushing MCK & CAH to clients. Especially MCK since it was added to the Top Picks Live list. Nice defensive name too.

I expect a nice up day for MCK. $78+?

(Posting this after open)

Thursday, September 15, 2011

Central European Distribution (NASDAQ:CEDC): Merger Talks with Anisimov, Rosspirtprom? - Citi

Citigroup's Beverages team is out with some interesting comments on Central European Distribution (NASDAQ:CEDC) noting Russian newspaper Kommersant has a front-page article this morning saying that CEDC is in merger talks with Vasiliy Anisimov and Rosspirtprom to combine their respective Russian assets into a single organisation.

According to the article, the discussion is around Anisimov receiving a 20% stake in CEDC in exchange for his various Russian alcohol assets (86% of Moscow vodka factory Kristal, VEDK distribution business with the exclusive distribution contract on the popular brand “Putinka”). A third party in the deal is reportedly Rosspirtprom, under whose umbrella the combined Russian assets would be managed. According to data in Kommersant, this would potentially increase CEDC’s market share from 14% to ~21%. None of the parties involved have commented on the press report.

According to Citi, this is not the first public speculation over a deal for CEDC and may not be the last given the difficult position the company finds itself in due to a combination of an underperforming operational business and a stretched balance sheet. Previously the stock has reacted positively to press speculation of acquisition (press reports of a $17/share offer by Roman Abramovich in May that an Abramovich spokesman later denied) or to investors building a large stake (Mark Kaufmann issued an SEC filing recently saying he had acquired 9.6% of the company). Last week CEDC’s Board of Directors adopted a “poison pill” giving them power to significantly dilute any potential unfriendly buyer, which could be taken as a sign the BoD has other plans for regaining investor confidence.

While it would be too early to make a fundamental analysis based on the details available, Citi's initial impression is that if such a deal is under consideration, they see more positives than negatives.

– First, this may solve CEDC’s Russian performance issues through the return of key managers who built the core Russian Alcohol Group (RAG) which CEDC acquired in 2008 (but who now, according to Kommersant, work for VEDK and Rosspirtprom). While they do not know the two managers in question they believe this change would be taken positively by the market considering the visible success of initially building the RAG business (and subsequent decline once these managers left).

– Second, the combination of improved consolidated cash flows and the return of these key managers would in our view significantly improve the company’s chances of meeting a major re-financing challenge in March 2013 when $300mln in convertible bonds comes due.

Notablecalls: CEDC has been beaten to bits following 3 disappointing quarters and I suspect that any change in leadership and operations will be welcomed by investors.

Rememeber, this was a $26 stock mere 8 months ago.

Gaining 28% market share in the Russian Vodka market? That's fairly significant. #1 player.

CEDC produced a 50%+ move on August 29 following the Kaufmann stake news which means it's a mover.

I'm guessing CEDC will see $7.50-8.00+ on this.

Here's the Kommersant piece, use Google translate.

Monday, September 12, 2011

Notable Calls on Twitter


I'm going to have another go with this Twitter thing. It didn't feel right the first time around but let's see how it works out this time. Just to give a little taste of what's going on at the Notable Calls Network (NCN) intraday.!/thenotablecalls

Good luck,


Tuesday, September 06, 2011

SodaStream International (NASDAQ:SODA): Upgrading To OW As Valuation Has Gone Flat - JPM

J.P. Morgan is upgrading SodaStream International (NASDAQ:SODA) to Overweight from Neutral with a $50 price target (prev. NA).

With the company reporting roughly in-line Q211 earnings and disappointing full year guidance, the stock has taken a major hit, dropping about 48% while the S&P has been up nearly 5% over that same time frame. While the stock has obviously lost momentum, they continue to believe that the short to medium term growth potential for SODA is strong and that their 2H guidance will prove to be too conservative. With the multiple having compressed from roughly 40x down to about 19x, 17x ex-cash, and with guidance that seems overly conservative, the firm thinks the stock is attractive here.

The details:

Growth is still there despite the conservative guidance. Even though SODA simply reiterated their FY11 guidance, which alarmed a number of investors, we continue to believe that SODA is a growth story. We believe the company’s 2H11 guidance is far too conservative as the company implied top line growth of nearly 31% for Q311, but only 10% growth YOY in Q4. Even though SODA faces a tough +59% comp in Q411, we note that their total US door count at this point (assuming no move into mass) has grown by +86%. In the end, we think that SODA's guidance will prove to be too conservative and we expect the test in mass (and a potential full roll-out) to provide upside to Q4 numbers. We are currently forecasting 16% revenue growth for Q4, but think our estimate could be too low.

At 19x our FY12 estimate, 17x after adjusting for cash, the stock is too cheap. With the stock down more than 50% from its high, we believe that stock is clearly much more attractive, especially as we believe there are no material changes to the story. With the rest of our group having re-rated positively since the market’s turn, SODA is just trading at a slight premium to the group.

US door growth is high, and trends continue to be strong at BBBY. We expect US doors to be up almost 100% yoy in Q4, and while the comps get more difficult, we still expect strong growth. Over the past few weeks we have contacted a number of Bed, Bath, and Beyond locations (BBBY locations are about 13% of US doors) to get an update on SodaStream products. Overall, it appears that machine and flavor sales, along with C02 refills continue to be strong, which is very encouraging.

We rate SODA OW. While the LT growth profile is less than the bulls would like to think, the ST results should be better than expected. Establishing a $50 price target for December 2012 based on 21x our 2013 estimate. As management discusses the conservatism baked into their Q4 guidance, we expect the multiple to move up

Notablecalls: SODA was a $80 stock back in the beginning of August. The recent high-flyer got smashed after management failed to raise guidance on its most recent conference call.

So now it's at $35 trading 19x EPS while growing EPS by 30%+. We saw a couple of tier-2 firms pound the table to bits on the way down, with little success.

Now we have a tier-1 firm out saying SODA is not a broken story and that things are going pretty well for them. JPM actually highlights some checks they made and these came back positive.

That carries some more weight. A lot more weight actually. Short interest stands at over 70%. The valuation is bound to adjust at some point.

One to watch. If this one gets going, the shorts will have one hell of a task keeping it down here.

Tape's drek but the lower we open the better chances we have for an outsized bounce in my humble opinion.

Friday, September 02, 2011

OmniVision (NASDAQ:OVTI): Post F1Q earnings sell-off overdone - JPM

J.P. Morgan's Paul Coster had a chance to touch base with OmniVision's (NASDAQ:OVTI) CFO, following his return from Asia Pacific region.

- The feedback?

Surprisingly positive.

Coster says he is now convinced that weaker-than-expected F2Q guidance originated in industry-wide weakness in the CE supply chain and does not originate in a head-to-head competitive loss at a Tier 1 OEM. For this reason, he thinks the post F1Q earnings sell-off overdone & recommends buying the OW-rated name.

The details:

Re-visiting F2Q Guidance. The CFO’s commentary is consistent with the earnings call. The weaker-than-expected (by sell-side analysts) F2Q guidance originates in several concerns: 1) slowing PC/Notebook sales, 2) component channel inventory build-up, 3) temporarily weak demand from some OEMs that are experiencing “transitions” (possibly RIM, Nokia), and 4) the later than expected ramp in BSI-2 product.

Head to head with Sony. OVTI’s CFO appeared unsurprised by Sony's August 30th CIS presentation and acknowledges that Sony is a credible competitor at 8MPx. That said, he believes OVTI has only gone head-tohead with Sony once (so far) and claims that OVTI won the resulting design opportunity for a 2012 product.

What about Apple iPhone 5? Consistent with past practice, the CFO will not acknowledge Apple as a customer, whether direct or indirect. That said, the CFO made the point that build lead-time for handset OEMs has collapsed to 30 days (from chip shipment to finished product in retail), and can be crammed down to 15 days under duress. We think this lead-time is surprisingly short, and is consistent with OVTI being well-positioned for the holiday ramp with Tier 1 OEMs (including Apple), notwithstanding the disappointing F2Q guidance. It is, for
instance, consistent with the notion that OVTI introduces BSI-2 8MPx product in late F2Q, and still captures Apple iPhone 5 opportunity if that product ships in mid/late October

What is the problem with BSI-2? The CFO denies that there are design issues with the BSI-2 chip, but acknowledges that the manufacturing process has not yet met the company's expectations regarding consistency. We view this as an engineering challenge that can be resolved in the next month or so.

Notablecalls: OVTI got clobbered a week ago following #'s. The reasons? There were 3:

- The conference call was just awful. I hope OVTI's management is reading this post. Guys, stop beating around the bush and get to the point. I had to read the transcript 3x and I still had hard time understanding what the heck was said.

- Concerns around Apple. It appears this call by Coster does a fairly good job putting some of these in bed. OVTI's CFO is hinting they still have the AAPL deal (we know AAPL & Sony went head-to-head on this).

- BSI-2. That's an issue. I'm not entirely sure TSCM can get this right in the next month or so. (Kudos to FBR on this! Brilliant call!)

All in all, I suspect OVTI may produce a bounce here following the JPM comments. Back above $18?

Tough call to make in this tape, obviously. Why not just buy the effin' market.

PS: I'm posting this after open.