Wednesday, July 18, 2012

Tesla Motors (NASDAQ:TSLA): Downgrade to Sell On Likely Reduced 3Q Production - Wunderlich

Wunderlich Securities is downgrading Tesla Motors (NASDAQ:TSLA) to Sell from Buy with a $28 price target (prev. $49).

- The downgrade comes after reports of production cuts

Wunderlich is lowering their estimates, rating, and target for Tesla (TSLA) on likely 3Q12 production cuts for sales of the Model S. The shares, which recently reached $36, have fallen on both profit taking and the growing realization that 3Q12 estimates are at risk, with production likely coming in at the low end of the range. While the company is sticking to its 5,000 unit forecast for 2012, how it gets there becomes a second issue for it to resolve. While Wunderlich believes that TSLA is doing everything right from a business perspective and has demonstrated superiority of design, they believe the market may pause to see how it handles the execution, allowing the shares to retrace the year's gains.

Production cut to 500 units in 3Q12 and some pushouts. While initially saying that it would produce and sell 1,000 cars in 3Q12, TSLA now says it will certainly be 500 cars. All the Street estimates assume 1,000 cars and so there will be inevitable cuts to estimates. Firm notes they also heard that there are some pushouts of deliveries and this would be consistent with production headed for the lower estimate, but they have not been able to verify this first hand.

Why the production cuts? Tesla wants to be sure the cars are right and apparently they are not in a position to ramp to get to 1,000 units this quarter. From Wunderlich's own due diligence, they don't believe there is any shortage of components, so it could be as "simple" as just getting the hang of lining up all the body panels, which is part art. Could it be something more serious? If it were more serious, they believe sales would have been delayed - but who knows?

Raises issues for 4Q12. Tesla is still sticking to its 5,000 unit full-year production forecast and this would imply 4,500 units in 4Q12, up from 4,000. How it gets to this higher volume when it is having issues now makes it a bit of a wait-and-see story and, in this market, there isn't much patience for waiting! So while they believe Tesla has all the design and most of the execution right, they need to see how the execution issue is resolved.

Notablecalls: TSLA is having production issues, it appears. This is going to hurt the stock. Maybe as bad as -10% today.

Monday, July 16, 2012

Mead Johnson (NYSE:MJN): "Fear Of The Dragon" - Downgrading To Sector Perform - RBC

RBC Capital is downgrading Mead Johnson (NYSE:MJN) to Sector Perform from Outerform with a price target of $80 (prev. $95) pending more clarity on the sales outlook for China.

- RBC thinks MJN could miss Q2 sales estimate by about 5% and report a negative volume number.

According to the analyst, Ed Aaron the MJN story has become highly controversial in recent weeks as investors have begun to question the growth prospects for China, which in 2011 accounted for 29% of sales and about two-thirds of the company’s 17% sales growth. While Mead’s messaging on China has been incrementally more cautious for the past couple of quarters, investors’ interpretation of this message has changed in recent weeks, reflecting: 1) Mead’s presentation and discussion of China category growth and market share data at a competitor conference last month; 2) syndicated data showing decelerating growth; and 3) myriad data points indicating a broad-based slowdown in China consumer spending growth. Examples include McDonald’s, Nike, Coach, and Tiffany, to name a few.

Accurately assessing the rate of deceleration is exceedingly difficult coming off a period of such extraordinary growth. Last year, China/HK grew 45% and accounted for two-thirds of Mead's 17% sales growth. China/HK sales have more than doubled in the last three years.

Assessing the impact of slower near-term China growth on the Mead investment thesis requires an understanding of not only how much growth has slowed, but also why. If the slowdown is mostly a function of unusually tough comps and near-term distortion resulting from the double-digit price increase that went into effect in April, it would be viewed as more transitory in nature. To the extent that the slowdown reflects either growing macro weakness or changing competitive dynamics, it would present a bigger challenge to the investment thesis. RBC believes each of these factors is having an impact to some extent. They are inclined to believe that the more transitory factors are the most significant, but it’s difficult to assess the exact magnitude of each.

See risk to sales expectations. The firm thinks Mead could miss Q2 sales estimates by about 5% and potentially report a negative volume number for the quarter. While they still think full-year guidance is achievable, they are no longer convinced that guidance has upside.

Lowering estimates to incorporate slower China growth. RBC lowered their FY-12 and FY-13 estimates by $0.10 and $0.20 respectively, which takes them from above consensus to below consensus. Their China/HK organic growth assumptions include: +12% for 2Q12, +16% for FY-12, and +15% for FY-13.

Notablecalls: This is a potentially significant call that could send MJN stock down several points today and in the coming days.

Here's why:

- MJN is all about Asia and things appear to be cooling there.

- The stock trades at a +20x fwd P/E, which of course means it's expensive and needs to produce significant growth to justify the valuation.

- RBC is calling for a Q2 EPS miss. Again, I point out the +20x fwd P/E. If RBC is right and MJN produces a below-consensus # in 10 days the stock is going to be 10-15 pts lower (MJN is scheduled to report on Jul 26).

- MJN has been such an analyst darling (note RBC has been OP rated for ages) and once the tide turns it's going to hurt. The stock feels broken here.

I'm thinking to the tune of 2-3pts of downside today and possibly more toward low $70's ahead of Jul 26.

PS: I'm posting this after open. Use possible bounces to scale in.

Monday, July 09, 2012

Actionable: Visa/Mastercard (NYSE:V/MA): Downgrade to Sell - UBS

John T. Williams from UBS Equity Research is making a potentially major call downgrading both Mastercard (NYSE:MA) and Visa (NYSE:V) to Sell.

- V price target goes to $113 (-$14), MA to $403 (-$54)

V and MA shares sit near all-time highs despite exposure to a weakening global consumer spending backdrop—which makes a slowdown in key metrics inevitable over the next 3-6 months, in UBS view. While both possess expense leverage and remain attractive “safe havens” relative to banks and FinTech names, multiple data points indicate global growth is slowing—clear negatives for the shares.

Three key reasons for the downgrades:

1) Weaker US economic data imply a consumer-led spending slowdown is underway (US is 52% of volumes for V, 38% for MA);

2) Global growth is also slowing—UBS expects a modest near-term slowdown in cross-border revenue for both networks, while FX is a meaningful revenue growth headwind (Europe accounts for 29% of MA’s spending; 48% of V’s volumes are international—ex-Europe).

3) Near-term noise, which includes a variety of issues and catalysts: potential settlement of the “Brooklyn case” (which could be positive or negative), the evolution of US PIN debit into a utility-type business (modest negative), and subtle shifts in the balance of power between networks and issuers/merchants including upward pressure on rebates and incentives (negative).

And here's the most important part of the call:

Few incremental buyers
Since their February industry launch, they have noted a very high comfort level and distinct positive bias among investors for both V and MA shares, given the companies’ strong models, growth and returns profiles, and defensiveness relative to bank stocks. While they understand (and concur with) much of this view, most investors with whom they have spoken seem to love (one or both of) the stocks and own the stocks—but are largely comfortable with their positions and are not inclined to add at current levels. In other words, they sense some complacency—and while the overall consensus view is very positive, there appear to be very few incremental buyers—and a low short interest—at current levels.

Notablecalls: Actionable Call Alert!

Nothing new in the US/Global spending slowdown comments. But do note the positive-bias related comments among institutional investors. I can't believe there is only 2% short interest in both V and MA. True consensus longs.

The UBS comments spill blood in the water - and it's bound to attract sharks. Whenever you see consensus longs like these highlighted as prominently, short-sellers will show up to feast. The investors will be defenseless.

I suspect both MA/V will be down 2-3% today (could be more for V) and more in the coming days and weeks.