Tuesday, February 19, 2013

Cliffs Natural Resources (NYSE:CLF): Actionable Call Alert!

J.P. Morgan Metals king Michael Gambardella is making a major call in Cliffs Natural Resources (NYSE:CLF) this morning upgrading the iron ore miner to Overweight from Neutral with a $40 price target (prev. $35).

- Since mid-September 2012, Cliffs’ peer group is up 17% on average while CLF is down 37% despite a 53% rise in seaborne spot iron ore prices – the current discount between Cliffs’ stock price and iron ore prices is now at the widest spread on record.

Gambardella attributes this substantial relative underperformance to persistent disappointments at Bloom Lake presented to the market piecemeal over the last two years, ultimately culminating in a 20% writedown on the initial $5B purchase price, a threefold increase in Phase II capex, and a 76% dividend cut. Additionally, the recent capital raise diluted shareholders by 15-17% but reinforced Cliffs’ balance sheet to endure future commodity volatility and possibly fund future growth projects.

In his view, Cliffs’ shares reflect this series of negative events and are only pricing in $110/tonne iron ore in 2015, 29% lower than current spot prices, based on the stock’s average EV/EBITDA multiple of 5.6x. Gambardella believes the stock’s reduced sensitivity to rising iron ore prices post 3Q12 earnings and the historically wide gap versus spot seaborne indices should dampen any potential downside if the recent run loses momentum following the end of the Chinese New Year. In his opinion, management has reset Bloom Lake’s expectations to an achievable level and given sentiment appears apathetic at best (9% buys after three recent cuts to neutral/hold) he believes merely meeting guidance at the key project will be enough for Cliffs to begin climbing over a large wall of worry. As this process unfolds Gambardella sees the market re-rating CLF’s valuation higher for its renewed leverage to iron ore prices, which he believes have a positively skewed risk profile in the medium term.

In his opinion, 2015 seaborne iron ore prices have more potential upside price risk in the medium term than reflected in forecasts by J.P. Morgan’s commodity team or consensus estimates.

Some of the more interesting details from the call:

- Execution on Bloom Lake key to stock appreciation...
We believe the stock’s muted correlation with robust iron ore fundamentals and record discount to current prices suggest this former prime driver will take a back seat to results delivered by management relative to the new Bloom Lake plan. In our view, Cliffs has likely reset the bar to an achievable level in 2013 after the recent streak of poor performance and a 20% write-down of the initial purchase price perpetually disappointed investors. Given this poor track record, merely meeting the new guidance could be enough to boost sentiment and the share price; we would note the first phase at Bloom Lake exited the year on track with its stand-alone 2013 target.

- … and re-establishing leverage to seaborne prices. We expect Cliffs’ leverage to seaborne prices will gradually increase over the next three years with the addition of Bloom Lake Phase II and long term USIO contracts rolling over into shorter, spot centric agreements. Assuming management delivers Phase II on time and budget, CLF’s valuation should re-link to iron ore prices, which we believe could ultimately remain higher for longer than consensus and our internal commodity team expect.

- Potential value outside of Bloom Lake. Although Cliffs declared the project is the future of the company, we believe management is also in the process of unlocking value in several other areas. We estimate Cliffs could net EBITDA improvements of 10% and 11% versus our 2013 and 2014 forecasts if Wabush operations break-even ahead of our current 2015 timeline. Separately, we believe management could conservatively monetize the estimated $500mm spent on purchasing the chromite properties and bringing the project to feasibility by taking on a partner or selling the stake outright. Additionally, we expect the company will take steps to mitigate material contract expirations at USIO by developing and marketing DRI pellets while potentially expanding its optionality to export more than its estimated current limit of 2mm tonnes of pellets annually.

- We would note holding the current $155.10/tonne iron ore price in 2015 yields a $75 price target utilizing the stock’s long term average EV/EBITDA multiple of 5.6x, 160% above the current stock price.

Actionable Call Alert!

- Gambo is the Axe in the space. He downgraded CLF back in Sept '12 - 15 pts higher. One of the few analysts that can actually time the market.

- Gambo notes management has reset Bloom Lake’s expectations to an achievable level. Remember this guy has a very good management bullshit detector. Molycorp anyone? So if he says Bloom Lake is good, it's likely good. At it's mostly about Bloom Lake right now.

- It's an out-of-consensus call as Gambo himself notes. There are very few Buy-rated analysts out there. Shorting CLF has been the hip trade. Chart looks awful and I suspect everyone and their mother has been expecting a downside break. Short intrest stands around 20%. They could be in for a nasty surprise if Gambo is right.

- Note Gambo is going against JPM commodities team and Consensus on iron ore pricing. He thinks there's more upside.

- If he is right on iron ore pricing, CLF is a $75/share stock vs. ~$30/share today.

All in all, this call has potential to propel the stock back above the $30 mark and likely closer to $31 today. I say +7%.

Monday, February 04, 2013

Blackberry (NASDAQ:BBRY): Getting Ready for a Grand Blackberry 10 Debut; Upgrade to Outperform, Target Price $22 - Bernstein

Bernstein's Pierre Ferragu is upgrading Blackberry (NASDAQ:BBRY) to Outperform from Market Perform with a $22/share price target.

- They believe Blackberry should trade in the $20-25 range once a decent launch for Blackberry 10 and a stabilised trajectory for FY2014 are priced in.

Bernstein upgrades Blackberry to outperform today as they believe BB10 is set for a strong launch. Even if the long term prospects for the platform are very uncertain, the firm believes all is in place for Blackberry 10 to enjoy a great debut. They see four reasons to model a launch well above current expectations.

1 - Blackberry has drained channel inventories over the last 12 months and is in a very strong position to start shipping its new devices. Channel inventories came down by over 10m units over the last 12 months, which means most distributors and operators will take on significant initial orders (Exhibit 1)


2 – Blackberry 10 will propel up device gross margins. Bernstein believes the company currently sells high end devices at negative gross margins. As these devices are replaced by positive margin Blackberry 10 ones, Blackberry’s P&L should swing back into the black in 1QF14. They  are at this stage convinced initial Blackberry 10 shipments will carry gross margins in the region of 30%.

3 - The Blackberry 10 launch is supported by most operators. In their recent discussions with operators the firm noted a very broad support, with operators willing to give the platform a good push.

4 – Initial Corporate demand will be strong. Bernstein recognises rapid share losses for blackberry in corporate, as "Bring Your Own Device" becomes the norm, but the brand still benefits from a significant user base equipped with ageing smartphones. They have anecdotal evidence that a number of corporate clients have been waiting for Blackberry 10 to refresh their installed base, which will support shipments meaningfully in the first months of the launch. If only 10% of Blackberry’s 30m corporate users refresh their phone within the first 6 months of the launch, this would represent ~3m units alone.

The strength of this launch is overlooked by investors, creating strong opportunity to buy Blackberry.

- Bernstein conservatively expects shipment of 1m units for January and February, in the current quarter, and thereafter 1m units per month in March to May, generating 3m units of BB10 sales in the first fiscal quarter of 2014. As a reference, the current sell through run rate of Blackberry is close to 3m units a month.

- They assume ~$550 ASP and 30% gross margins for BB10 devices, which is in line with communicated selling prices and their channel checks. This would drive gross profits 24% above current expectations for 4QF13, 32% above expectations for 1QF14.

There is no bear case related to the evolution of Service revenues.

- For the last two years, Blackberry's service revenues have remained stable, in the region of $1bn a quarter, driven by a stabilising user base and resilient ARPU.

- It is well understood that the migration to Blackberry 10 will create some pressure on Service revenues, most likely for some consumer segments. Bernstein models an average service revenue per BB10 user 50% below the current average. On that basis they see two potential scenarios, and the stock working well for both!

- Either Blackberry 10 is a slow launch, driving limited upside.
In that case, older contracts will continue to form the vast majority of Blackberry’s user base. Blackberry will continue to benefit from the service revenue cushion. In that scenario, Blackberry’s business model is much more resilient than consensus expectations imply.

- Or Blackberry 10 is a success, and in that case, there is a risk that service revenues come under meaningful pressure. The irony is that if Blackberry 10 is a success, some pressure on Service revenues would be the least of Bernstein's concerns and more than compensated by a recovery in the device business.

Notablecalls: Ferragu has been a major bear in Blackberry since '10 with a couple of stints on the Market Perform side along the way. Now he is making a rather significant call saying the stock should trade ~100% higher. This will not go unnoticed.

His views regarding the Services side potentially ending in a  win-win situation are also quite interesting and should work to calm investor fears.

With the stock down 5 pts from the $18+ highs I suspect a strong case for a long trade can be made here. Potential 10%+ move in the cards.