Apple (NASDAQ:AAPL): Apple could report disappointing F4Q09 revenue, according to checks - Oppenheimer

Oppenheimer is out with a potentially venomous call on Apple (NASDAQ:AAPL) saying they Apple could report in line to slightly disappointing F4Q09 revenue ($9.0B-$9.2B) and would keep some powder dry to buy shares following the print, rather than ahead of it.

The focus of their concern is the iPhone. While demand for the product appeared to run ahead of firm's 6M unit target, they believe component/manufacturing hiccups may have prevented Apple from fully meeting demand during F4Q09. They'd use any pull-back as an opportunity to aggressively accumulate additional shares ahead of several near-term catalysts: a potentially gargantuan December quarter for iPhone (assuming no further component issues); re-acceleration of Mac growth with the release of the new MacBook and iMacs; and the likely announcement of the tablet in early 2010.

The first hint of trouble for the iPhone surfaced during the iPod event on Sept. 9, when Apple implied that ~3.5M phones had been sold with only 21 days left in the quarter. Subsequent checks showed the iPhone 3GS sold out in many markets. Something was clearly preventing Apple from shipping to demand.

- Recent carrier surveys suggest the supply constraint has eased. But it's difficult to judge when the bottleneck was resolved, or how many iPhones might have shipped in the final 21 days of the quarter. Consensus estimates imply that 3.5M phones flowed out to customers in the final weeks of 4Q09, which may be too aggressive.

- With demand for the iPhone apparently outstripping supply, December could be a substantial catch-up quarter, both in terms of sell-through and channel replenishment. Barring any additional component or manufacturing disruptions, Oppenheimer believes their 8M unit assumption for F1Q10 could prove conservative, especially given the iPhone's expanding carrier footprint.

- On Mac, they believe upside potential relative to the consensus range of 2.7M-2.8M units is limited, as persistent chatter about a new MacBook and iMacs likely delayed some purchases. Oppenheimer believes F1Q10 YoY growth rates will be significantly more impressive than for F4Q09.

- On gross margin, they expect Apple to significantly outpace consensus on a GAAP basis (they're at 37.3%), as a result of higher iPhone mix and a strong software contribution. Non-GAAP gross margin is likely to be only slightly above the consensus 40.3%—if iPhone caution proves true.

Notablecalls: Wow, calling a potential miss for Apple (AAPL) this is a bold statement from Oppenheimer's Tech/Applied Tech team!

INTC, IBM etc have sold off on pretty stellar (well, at least seemingly stellar) quarters so you would imagine the reaction when Apple actually misses on revs. When was the last time that happened? 4 years ago? Intstant -10-15pts in the cards?

This is a major (sentiment) negative for the stock here, I suspect. Supply issues or not, AAPL's current valuation is not built for that here.

I think we will see some hefty early downside in AAPL stock once the call starts to circulate the trading desks.

I see 3-5 pts of downside today if the market cooperates.

Par Pharmaceuticals (NYSE:PRX): Upgraded to Overweight at Barclays; target raised to $30

Barclays is upgrading Par Pharmaceuticals (NYSE:PRX) to Overweight from Equal Weight with a $30 target (prev. $18)

Despite admittedly strong YTD performance, the firm sees sufficiently significant upside in the stock to justify the higher rating based primarily on attractive valuation on their upwardly revised, high-conviction EPS ests. & high probability of further upside to their forecast. Specifically, they view the unexpected approval/ launch of generic Catapres in Aug as a "thesis changer" given the windfall cash flow which will increase Par's financial flexibility. Potential delayed competition for Catapres & approval/ launch of generic Ultram ER offer EPS upside, the latter potentially adding +$0.50 on annual basis. With the stock trading at only 8.6x Barclays' revised FY11 est, they see ample room for outperformance as the story gains greater appreciation.

As a reminder, in May, Barclays first highlighted Par as an interesting special situation which warranted diligence, based on very achievable FY09 estimates, characterized by strong visibility and potential significant upside, the latter from potential delayed generic competition on generic Toprol XL, Imitrex, Antivert, and Marinol. However, despite confidence in their estimates, tempering their stock conviction was the view that management still needed to build a more consistent track record of solid earnings and communication (neither of which it had done in the past).

While we are still in the early stages of the latter, the “thesis-changer” for Barclays was the completely unexpected FDA approval of Par’s generic Catapres (announced Aug 18) -- after the application sat at the agency for 8 years and, deservedly, was viewed by the Street as a near zero probability commercial opportunity before the approval. Close behind Catapres in importance was a favorable lower court patent litigation decision on Ultram ER (announced Aug 17), which is an attractive first-to-file generic opportunity for Par. It is these two events which also drove much of the recent stock outperformance, in otheir opinion. What makes generic Catapres particularly attractive is that, unlike most first-to-market generics, limited competition can be expected for quite some time, with Mylan and perhaps an authorized generic as the only likely additional competition owing to very high technological and regulatory barriers to entry. As a result, the firm expects this long-tail product to raise Par’s earnings base and provide a fairly sustainable source of cash flow. With this windfall, they expect management to have greater flexibility to potentially renegotiate existing product partnerships on more favorable terms, increase new business development activities, and/or restructure Par’s balance sheet as it sees fit (with yesterday’s announcement to repurchase outstanding senior convert notes an example) – all which should further strengthen the company’s long-term outlook. At the time of the FDA approval of Par’s generic Catapres, some uncertainty remained on launch timing and near-term competitive outlook. Now, nearly two months after launch, Par has shipped product to 90% of the potential customer base, and has captured over 50% share of total prescriptions. With our current assumptions, they estimate the product adding at least $0.35 in annual EPS versus their previous estimates

Raising FY09 EPS est to $2.19 from $1.81. Critical FY11 breakout year est. moves to $2.57 from $2.11.

Notablecalls: Nice target raise, nice chart. It's not too hard to see the logic behind Barclays' upgrade. I think this one will work.

I suspect it can trade to $23 as soon as today.

Intel (NASDAQ:INTC): Another Quarter, Another Massive Beat and Raise But Several Signs of a Peak; Reiterate Neutral

JP Morgan is making some interesting points regarding Intel's (NASDAQ:INTC) quarter:

Yesterday after the close, Intel reported 3Q09 EPS of $0.33, $0.05 above JPM estimate of $0.28 and $0.06 above Consensus of $0.27 due to higher than expected revenue and gross margins. Revenue increased 17% QoQ to $9.4 billion, well above their estimate of $8.9 billion and Consensus of $9.0 billion due to higher than expected microprocessor and chipset sales. Gross margins were 57.6%, an increase of 680 basis points QoQ and were above JPM 55.0% estimate and guidance of 53%-55% due mostly to higher than expected utilization rates.

- Margins up sharply. Intel guided 4Q09 gross margins to increase roughly 440 bps QoQ to a range of 62% plus or minus 300 basis points due to higher utilization rates, sale of written-down inventory and mix. JPM expects 4Q09 gross margins to increase by 540 basis points to 63.0%.

- Roughly seasonal 4Q09 guide. Intel expects 4Q09 revenue to increase from a range of 3% to 12% QoQ ($9.7-$10.5 billion), with a midpoint of $10.1 billion (up 8% QoQ), roughly in line with the normal seasonal increase of 9% QoQ.

- 2003 all over again. JPM notes they are getting a strong sense of "deja vu all over again" with Intel’s 2009 looking a lot like 2003 from a revenue increase and margin profile standpoint. They believe the company is outshipping demand, as evidenced by Intel getting back to peak revenue while total PC revenue should be down 20% from the peak during 4Q09.

- Several signs of a peak. Although Intel is clearly executing flawlessly, they are seeing several signs of a peak in the stock in terms of gross margins and processor unit growth well above PC unit growth. In addition, as they stated in their preview last week, there appears to be a few signs of softening in orders from the PC food chain. JPM will closely monitor Taiwan notebook demand, the hard disk drive market, and lead times during 4Q09 for signs the upturn is over.

INTC stock follows gross margins – peaking now
Although Intel beat and raised again during earnings season, the firm believes most of the upside is already in the stock due to an imminent peak in gross margins. As they have stated in their rule #7 in their "Top 10 Rules for Semi Investing", Intel’s stock follows Consensus gross margin estimates. JPM believes Intel should reach 63% gross margins during 4Q09, which is roughly one point below the 10-year peak of 63.9%.



As shown in the table below Intel’s gross margin peaks during past cycles over a 15- year period from 1993-2008 demonstrate a pattern of declining gross margin peaks as the company has ventured into non-core businesses that carry lower margins. They expect Intel's peak gross margin during the current cycle to be 63.0% in 4Q09E, just 90 basis points below its 3Q00 peak gross margin of 63.9%.


Intel units far outstripping PC units
While J.P.Morgan estimates for PC shipment growth have been recently revised upwards from -10% YoY to -0.8% YoY in C09, it appears that Intel’s microprocessor units have rapidly outgrown the recovery in PC units during 2009. If they assume Intel’s revenue increases at a normal pace during 4Q09, their proprietary chart of PC vs processor units would result in the biggest inventory build in a decade during C09. Firm would note estimated 4Q09 CPU shipments of 90.6 million units are roughly 15% above estimated PC shipments of 78.6 million units during 4Q09 which would result in an inventory build entering 1H10.

- Raising estimates. JPM is raising their C09 revenue and EPS estimates from $33.6 billion and $0.95 to $34.9 billion and $1.09 due to higher revenues and gross margins. They are also raising their C10 revenue and EPS estimates from $35.0 billion and $1.13 to $40.0 billion and $1.45.

- Reiterate Neutral rating due to concerns on end demand and downside to estimates. Firm is establishing their December 2010 price target of $17.00 on Intel, which is 12X C10E EPS estimate, at the low end of its range of 12.0X-25.0X earnings.

Notablecalls: I'm not making a call here but I thought to highlight these comments from JP Morgan. Things surely look good here and I see mother Merrill raising their target to $27 along with FBR.

How long will this last?

Everyone is going ga-ga but do note Intel's Q309 revenue is about -7% vs. same qtr last year. Cost cuts, sale of written down inventory etc. brought a lot of upside to the bottom line.

Notice how Intel pared back capex for the year? What does that tell you?

Pacific Sunwear of California (NASDAQ:PSUN): Upgraded to Outperform at FBR Capital; $9 target

FBR Capital is out with a major call on Pacific Sunwear of California (NASDAQ:PSUN) upgrading the shares to Outperform from Market Perform with a $9 target (prev. $3).

According to the analyst the upgrade is based on:

1) product focus returning to an emphasis on brands, 2) controlled inventory, 3) guidance and consensus that they believe could be sufficiently conservative, and 4) opportunities in the company’s store base to close underperforming stores. FBR's store checks during the quarter have shown an increase in branded product, with a return to better showcasing “heritage” brands as well as introducing newer brands. They also noted less breadth and depth of markdown than last year. Firm further believes the company’s 3Q09 guidance for negative high teen to low 20% comp and LPS of ($0.16) to ($0.23) should be sufficiently conservative. With a new CEO, easier compares in 2H09, and new brands that could attract an incremental customer, they believe deep-value investors should begin to look at PSUN.

However, on the conference call, it was clear that many of the initiatives of the past 12 to 18 months would be reversed, including a deeper penetration of branded product, reintroduction of footwear and accessories, and returning to the company's core heritage brands. FBR believes uncertainties remain, and they are early to the fundamental turn in the name. Nonetheless, they believe downside in shares is limited, and they believe deep-value investors are likely to support the stock at or close to current $6 levels, as there is potential for open-ended upside if we begin to see improving top-line trends.

Due to their belief that the quarter is sequentially improving, the firm is increasing their 3Q09 comp estimate from –20.5% to –17% and LPS from ($0.19) to ($0.15). FBR's FY09 estimate goes from ($0.64) to ($0.60); FY10 estimate goes from ($0.19) to ($0.15). Price target increases from $6 to $9, which represents an EV/sales multiple of 0.5x FBR's FY10 sales estimate of $1 billion.

Focus on staff training and real estate opportunities. Through their checks, FBR has noted an improved attention to the customer by sales associates. They believe that the company is impressing upon its staff the importance of attention to customer, which they expect will result in increased conversion rates. Additionally, the firm believes approximately 100 leases will come up for renewal over the coming year, and they believe the company continues to take a close look its real estate strategy, as it negotiates better terms.

New CEO is introduced to the Street. The 2Q09 earnings call was the first time that investors and analysts were introduced to the new CEO, Gary Schoenfeld. FBR believes that his prior knowledge of the active sports industry from his time at Van’s should prove advantageous in developing the go-forward strategy for PSUN. They believe that Mr. Schoenfeld will use the 3Q09 conference call as an opportunity to further highlight details of the turnaround strategy going forward, which could serve to generate incremental investor interest in the story.


Tennant curve methodology. Despite the weak top-line sales and margin contraction, they believe we should begin to see sequential comp and margin improvement in 3Q09. FBR believes downside in shares should be limited, with open-ended upside if the company begins to see improvement in top-line trends. As such, they believe shares warrant an Outperform rating

Notablecalls: I suspect PSUN can trade up 10%+ today on this upgrade. Here's why:

- Take a look at what the stock did when Pali Capital upgraded the stock to a Buy back in August (stock was up 15% on the day). Note that Pali was one of the few firms positive on PSUN. I'd like to believe FBR Capital carries way more weight than Pali, especially when it comes to Speciality Apparel.

- As I mentioned, most firms are still farily cautious on PSUN which means expectations coming into the quarter are low. PSUN is scheduled to report on Nov 18.

- The new CEO, Gary Schoenfeld kept expectations low (possibly intentionally) as like most new CEO's he does not want to overpromise and underdeliver. His tone may me more positive this time around.

- The chart looks great. The $9 target from FBR offers 50% upside and there is no way to stop this one here.

- Most small retailers have been on fire lately.

How to play it?

Well, people will drive this one nuts in the pre-market action. Nothing wrong with participating but just remember you can't get decent size until the market opens. Use the open dip (if there is one) to buy.

I see this one trading towards $7 level (or possibly even higher).

Sandisk (NASDAQ:SNDK): Downgraded to Sell at UBS

UBS is making a rather big call on Sandisk (NASDAQ:SNDK) downgrading the stock to a Sell from Neutral with a $18 price target (unchanged).

Expecting peak demand by mid-C4Q to limit further ASP appreciation
With NAND spot/contract pricing up 24%/9% in Q3 and holiday product builds typically complete by mid-C4Q, they downgrade SNDK to a Sell rating based on:

1) negative price elasticity that could limit the potential upside to earnings as a result of higher NAND flash prices leading to weaker unit or total bit capacity sales, 2) the approaching seasonal demand peak in October/November that could lead to weaker NAND flash ASPs starting in December, and thus serves as a negative catalyst for SanDisk shares given that it historically has tracked memory prices, 3) potential gross margin downside risk from the company’s royalty revenue stream which will see a pronounced decline starting in the December 2009 quarter and again in the March 2010 quarter due to new Samsung royalty rates taking effect, and despite ongoing manufacturing cost reductions that should help to maintain or improve gross margin especially in a benign to improving price environment. Furthermore, SanDisk is also on track to move back to a more balanced fab-lite model where 25-30% of bits are sourced from external suppliers and thus could limit the upside to margins in coming quarters.

Greater exposure to retail could limit bit shipment upside
Whilst UBS does expect SNDK margins to improve meaningfully in 2H09, retail card sales could be negatively impacted by higher prices or fewer promotions. Relative to peers, SNDK has low embedded NAND exposure in high capacity smartphones (16GB or higher), a product that the firm believes is driving much of the demand strength in Q3 and similar to late Q1/Q2. Though industry supply growth is moderate, Q1 demand seasonality is likely to be unsupportive for ASPs.

GM upside could be limited by new royalty rate, non-captive mix growth
They believe GM upside offered by higher prices and cost reductions from the 32nm migration could be partially offset by the effects of lower Samsung royalty rates, which have a partial quarter’s effect in Q4, and the shift to a more balanced 30% non-captive bit supply mix in coming quarters.

Seasonal Demand Peak Approaching
The manufacturing of products slated to be sold during the late November through year end holiday selling season typically concludes by late-October to mid-November and typically coincides with the peak in NAND flash price appreciation. Based on DRAMeXchange data, the NAND spot ASP M/M % change in October over the past 5 years was -5%, and compares to the up +9% seen in 2009 thus far. In the two month period ending in November, the 5-year average shows a -14% decline while the three month or quarterly Q4 average over the last 5 years is a -25% decline.

2005 was the last time ASP trends were up in October and the 2 month period ending in November. That period was marked by the strong growth of portable media players as a new demand catalyst, but seasonality still quickly came into play by December leading to a Q/Q ASP decline of -3%. UBS expects a similar trend to play out over the remainder of 2009 given that retailers are likely to not build significant amounts of inventory and the ramp of new smartphone products is likely timed to coincide with holiday launches and sales promotions.

Valuation: $18 12-month PT; Downgrade to Sell Rating
UBS' DCF-based PT of $18 is equiv to 1.3x P/BV. Sell rating. SNDK trades at a P/BV of 1.4x or consistent with a more normalized mid-cycle range.

Notablecalls: So, UBS is pretty much the first one to say the current upswing in NAND pricing is not going to hold. Pricing gets better so Samsung & others will up their production pushing pricing down again. The endless cycle.

They are probably right and will look cool with their Sell rating in a few months.

Research in Motion (NASDAQ:RIMM): Upgraded at Baird, positive comments from RBC

Research in Motion (NASDAQ:RIMM) is getting some interesting commentary this morning:

- Baird is upgrading RIMM to Outperform from Neutral with a $84 price target saying they would be buyers on recent weakness. RIMM has declined almost 20% since reporting Q2 on September 24, presenting what they view as an attractive entry point.

Strong forecast growth. Baird forecasts revenue to grow 34.9% this year and 19.7% in 2011, with EPS growing 22.0% and 17.9% over the same periods. - Smartphone market expanding. In calendar Q2, global smartphone shipments grew 26.9% YOY, with Apple and RIM both taking share YOY (according to Gartner).

- Upcoming device launches positive. They believe upcoming device launches in front of the holiday season, including Storm 2, could provide a positive catalyst.

- iPhone headline risks in the stock? With Apple recently announcing plans to offer the iPhone through three carriers in the U.K. and Canada, they believe at least some of the Verizon/iPhone headline risks are likely in the stock.

- Valuation compelling. RIMM is currently trading at 13.9x Baird's fiscal 2011 EPS forecast, vs. our big-cap tech index at 16-17x and the S&P 500 at 14.8x. Their $84 target price is based on 17.0x their 2011 fiscal EPS estimate of $4.95.


- RBC Capital highlights 10 reasons why they remains bullish on Research in Motion (RIMM):

#1-3) Competitive Advantages Intact. BlackBerry's 'crackberry' messaging, other advantages (e.g. battery life) remain unmatched. Strong Q3 unit guidance (37-48% Y/Y) affirms RIM remains relevant with consumers, carriers. RBC expects RIM to narrow competitive gaps in Browsing, Apps, UI (User Interface), next 6-12 mos. Despite intensifying competition, they foresee a shakeout, with RIM retaining global leadership.


#4) Don't Fear Moderating ASPs. Recent ASP mix-shift is not from competitive pressures, but self-inflicted, positioning RIM to better penetrate the mainstream Smartphone opportunity. Moderating ASPs are part of firm's long-term thesis on the Smartphone market (they expect ASPs to decline at est 8-10% annually to $273 end F12), but unit momentum and market penetration for RIM increases. GM's meanwhile are expected to remain healthy at 40-41%. This yielding growing earnings power with EPS above street at $5.43 F11 and $6.40 F12.

#5-6) Strong Market Growth Mitigates Competitive Impacts. Smartphones to grow est >40% annually to est 35% handsets by 2012. The hypergrowth means RIM can weather a 300bps competitive share loss, and still grow faster than street ests next 3 years. But Smartphones are not a zero sum game; RBC sees 3-4 leaders all taking share from NOK, MOT, etc.

#7) Healthy Margins. RBC foresees LT margins at 40-41% as RIM remains a highly profitable Smartphone to carriers (= healthy subsidy) and benefits from scale, supply chain efficiencies. They do not expect market commoditization.

#8-9) Pending Catalysts. They see multiple catalysts ahead, including product launches, prod/service innovations, financial results, Smartphone share gains, and improving investor visibility. RIM well positioned to capture non-NA Smartphone opportunity, est. 406M units by CY12 at 44% CAGR. Firm also foresees a recovering Enterprise upgrade cycle.

#10) Compelling Valuation. With est 38% F10 growth at healthy margins, valuation at 0.5x PEG and 14x FTM P/E vs. 9-46x historical, and 30x peers (including NOK at 17x and -4% FTM growth) in their view significantly undervalues RIM's fundamentals and opportunity, and has already built in significant competitive impacts. They foresee recovery and upside as competitive, margin fears dissipate and visibility improves to RIM's advantages, retained innovation leadership, margin resiliency and share gains.

RBC reiterates their Outperform rating and $150 target (Street high target).

Notablecalls: RIMM is starting to look like a major battleground:

- The bears tend to point out raising competition from Apple, Androids from MOT & DELL and even PALM. This should lead to lower volumes, lower ASP's and eventually lower margins.

- The bulls on the other hand highlight the international opportunity and the fact RIMM trades around 14x EPS.

Must say I have no clue how this battle will end. Nokia is yet to make its move in the space (I mean a REAL move) which is something that cannot be underestimated. Their R&D budget is bigger than AAPL, RIMM, PALM combined.

Meanwhile RIMM can (and probably will) beat estimates again making shorts look silly.

So RIMM is becoming another mindless trading vehicle with ratings changes slapped both ways depending on 10pt moves up or down.

Tough one.

Sigh.

Rackspace Hosting (NYSE:RAX): Expect growth to accelerate, upgrading to Buy with $23 target - Goldman Sachs

Goldman Sachs is upgrading Rackspace Hosting (NYSE:RAX) to Buy from Neutral with a $23 price target (prev. $16)

Firm notes their proprietary cloud hosting pricing survey indicates that Rackspace is well-positioned to stay ahead of new cloud competition, given its value pricing and reputation for customer service. In addition, small-medium enterprise customer trends seem to be stabilizing, which sets the company up to see accelerating growth from cloud and enterprise customer growth opportunities. They see significant upside to 2010 consensus, which should help drive the 31% upside to their new $23 price target (up from $16).

Catalyst
Despite a tough macro environment, Rackspace has continued to grow through the recession as strength in cloud and enterprise has offset the slowing growth from small-medium enterprises. Recent small-medium enterprise surveys indicate that trends in this customer segment may be stabilizing. This could set a more stable base, off which cloud and enterprise opportunities can drive accelerating growth. Goldman's cloud server hosting pricing survey indicates that Rackspace has a very competitive offering, which should help it stay ahead of new competitors entering the market. As a result, they are increasing their 2010/2011 and out-year estimates to reflect the greater revenue opportunity. Goldman's new 2009-2011 EPS estimates are $0.24 / $0.43 / $0.65, from $0.24 / $0.38 / $0.56 previously.

Rackspace well-positioned to benefit from the multi-year cloud opportunity. Goldman expects the adoption of cloud hosting services to be a multi-year process, as customers get increasingly comfortable relying on a virtualized environment for their infrastructure needs. Rackspace, along with Amazon, has an early mover advantage in the field, which positions it well as the market continues to expand. They expect cloud computing revenues to grow to $99mn, up 73% y-o-y, representing 13% of Rackspace revenues by 2010 YE). While this is still a small proportion of their revenue mix, they expect cloud computing to account for 24% of the incremental growth in 2010.

Rackspace to stay ahead of new competition. Recently, there have been investor concerns around whether Rackspace can gain on Amazon’s market share and stay ahead of the increasing number of players who are looking to partake in the growth opportunity. While Goldman believes the market is expanding fast enough that market share shifts have a lesser effect for now, nonetheless, the new competitors are a factor to consider for market share shifts down the road. Terremark, Hosting.com and Bluelock have recently launched their VMWare-based vCloud express offerings and Savvis has announced its beta launch of its cloud initiative as well. There have also been a host of smaller private players such as GoGrid and Softlayer who are competing in the same market. Based on their analysis, they believe that Rackspace’s headstart (over the new competitors), its current managed hosting scale and its reputation for customer service, should allow it to fend off new entrants, while competing effectively with Amazon.

Notablecalls: RAX is a mover stock and getting a blessing from Goldman Sachs will propel this one to a new high, I suspect.

Cloud computing is the new hype word these days and RAX is still trading 0.5x EV/EBITDA vs. 2x EV/EBITDA of CRM for example.

I see RAX trading over the $18 level today with $18.50+ seemingly prudent as an intraday target.

Should RAX keep performing, I see Goldman taking their target higher towards $30 range over the next couple of qtrs.

Wyndham Worldwide (NYSE:WYN): Upgraded to Buy at Goldman Sachs; $26 target established

Goldman Sachs is upgrading Wyndham Worldwide (NYSE:WYN) to Buy from Neutral with a $26 target (implying 60% upside).

Firm notes their recent meeting with management suggests a focus on 1) shifting the company to a recurring and high margin business model; 2) selling off existing timeshare inventory; and 3) managing the selling process for distressed timeshare, condos, and apartments as timeshare weeks without taking on capital exposure. Over the next several quarters they expect Wyndham to continue to push itself towards becoming a fee for service company while in the meantime, generating significant cash flow as it moderates its timeshare development activities.

Catalyst
As WYN continues to surpass earnings estimates and transition towards becoming more fee driven, they expect investors will give the company credit for the strong assets on its balance sheet and more fully value the shares. In Goldman's view, investors may not be applying high enough multiples to these segments given their individual intrinsic value and sustainability of earnings; however, as these divisions demonstrate more consistent performance, they expect a revaluation. In addition, firm's new analysis on the timeshare segment suggests significant “hidden” value exists. Although the value of timeshare may be debated given the current trajectory, they expect less debate as to the significant cash flow to be harvested from past investments in this segment.

In Goldman's view, Wyndham’s timeshare segment appears to the most underappreciated of the three. Rather than use their traditional EV/EBITDA approach to value this segment, they undertook a discounted cash flow assuming it will complete its construction in process but will not begin any new projects. Firm estimates that even if Wyndham does not commence any more timeshare projects and sales continue at current levels, Wyndham’s equity could be worth $26 share in 12 months.

Significant FCF over the next several years
As Wyndham continues to invest less in timeshare Goldman expects that its free cash flow should pickup significantly over the next several years. While they assume that Wyndham will not exit the timeshare business, it currently has enough inventory to sell for the next five years at current sales rates, thus they do not anticipate the company will need to spend on new inventory until 2011 or even beyond. This could create a period of several years where the company generates several hundred million dollars of free cash annually.

Wyndham is trading at only 3.2X 2011 EV/EBITDA vs. the lodging sector of 8.9X. Goldman expects these two numbers will converge as they do not anticipate any need to further lower guidance and in fact, Wyndham could consistently beat estimates.

Notablecalls: I expect WYN to trade over the $17 level today with $18 not out of the question.

- Goldman Sachs upgrading with a 60% price target usually gets attention from traders.

- The chart looks great. New highs are coming.

- Goldman's new target of $26 is the new Street high.

- The call actually makes some sense. It's boring but it makes sense.

I'm sure traders will drive this one nuts already in the pre-market. If you want to join them, fine with me. Personally, I'm looking to get long after the open dip (if there is one).

Neutral Tandem (NASDAQ:TNDM): Stock oversold; Reit Outperform and $33 target - Oppenehimer

Oppenheimer is out with an interesting call on Neutral Tandem (NASDAQ:TNDM) calling the stock oversold and reiterating their Outperform rating and $33 target.

Firm believes the stock has been oversold and would take advantage of the attractive entry point (TNDM trades at a discount to historical multiples, the towers and data-focused interconnection models). Following channel checks, they believe that concerns regarding emerging competition are overblown and TNDM could pull a number of levers to defend its market share. The first catalyst for the stock will likely be the company's 3Q09 report and they also expect a court ruling on patent infringement in November. The key risk to the story is migration to IP (3-10 years out) and consolidation (limited due to regulatory oversight).

- TNDM's horizontal niche, carrier neutrality, stellar margins and low capital requirements have attracted competition. However, they believe the barriers to entry are high, competition is limited and recent selling pressures are overdone.

- Oppenheimer's recent channel checks indicate that Peerless Networks has launched limited service in at least six markets. The competitor has managed to take some traffic away from TNDM, mostly by offering substantially lower prices, but this is also helping to expand the overall interest in tandem services

- They believe TNDM could resort to selective price discounts to retain its market share. Other defensive initiatives include: 1) Bundling new services; 2) Lower prices for new services in new territories; 3) Long-term contract discounts; 4) Focus on nationwide availability; 5) Explore the potential for SIP.

- Expected solid 3Q09 results will likely serve as a catalyst for the stock. Oppenehimer thinks TNDM is currently priced for the worst at 13x EPS and 5.5x their 2010E EBITDA, well below the 13-14x of wireless towers and close to 10x for data-focused interconnection models. Firm expects strong revenue growth and free cash flow generation in the next 2-3 years. They have stress-tested our model and still believe the company can beat its 2009 guidance.

Oppenheimer notes short interest in Neutral Tandem has increased dramatically in the past two months (to 4.6 million shares on September 15 from 2.3 million on July 31).

Another potential catalyst for the stock is the impairment of competition in the next few months. Neutral Tandem has filed a patent lawsuit against Peerless Networks and an injunction could be ruled in the next 2-3 months.

Notablecalls: I must say I like this call.

- Tandem is an analyst darling. Opco defended the stock back on Aug 6 but the stock is down another 10 pts since then. The problem the stock got whacked was because of raising competition from other 3rd party competitors (namely Peerless) but one would think this has been discounted by now.

- Tandem helps Telcos save money they would otherwise have to pay to incumbent local exchange carriers (ILEC's) for traffic. The service is better & it costs less. So TNDM makes sense in current environment.

- Opco highlights two n-t catalysts. 1) Results - TNDM has a tendency to beat expectations. 2) Potential injunction against Peerless.

- Short interest has taken quite a leap higher over the past couple of months and stands at around 14%. This of course means anything positive will propel the shares higher from here.

With the market tone positive this morning, I suspect TNDM may have some legs. I see the stock trading towards $23 level in the n-t.

NetApp (NASDAQ:NTAP): Upgraded to Outperform at RBC Capital

RBC Capital is making a pretty significant call on NetApp (NASDAQ:NTAP) upgrading it to Outperform from Sector Perform with a $33 price target (prev. $26).

Firm notes their checks suggest NTAP is so far witnessing Oct-qtr revenues ahead of expectations, which should enable NTAP to not just beat Oct-qtr estimates but also to guide Jan-qtr ahead of expectations. They view NTAP as an attractive way for mid/large cap investors to play the anticipated IT spending recovery in H209. RBC expects NTAP to exude a positive business tone at its analyst day in New York City on October
8.

Current Checks Suggest Upside to Demand: RBC's checks suggest Oct-qtr is tracking ahead of plan and NTAP is seeing strength across its product portfolio but more so in mid/high-end products. Firm notes they haven't noticed any deal slippage due to loss of DDUP acquisition. While it's early in the quarter, Europe is starting to show strength for NTAP, which if sustained should yield incremental savings. The federal vertical continues to remain strong in Oct-qtr.

Key Suppliers Suggest H209 Strength: Last week, two of NTAP's key suppliers reported (Jabil and Xyratex), both suggesting enterprise demand and trends at NTAP continue to track positively. Both Jabil and Xyratex experienced better-than expected shipments for their August quarters, and both expect NetApp to remain strong through at least their November quarters.

Pricing Is Stabilizing: RBC believes the pricing environment for enterprise storage systems, while still aggressive, remains at minimum consistent with last quarter, which marked a healthy rebound from calendar 1Q09's gross margin level. This should enable NTAP to maintain healthy gross and EBIT margins.

Forward Expectations. For Oct-09 they increased their revenue and non-GAAP EPS estimates to $863.1 million (was $854.7 million) and $0.30 (was $0.28), which are above current Street estimates of $861.2 million and $0.29. In addition, they increased their FY10 revenue and non-GAAP EPS estimates to $3.58 billion (was $3.56 billion) and $1.27 (was $1.21), which are also above the street estimates of $3.53 billion and $1.22.

Notablecalls: While NTAP stock has doubled over the past 6 months, I suspect it may be setting up for another push higher. This is helped by:

- Raising consensus (I'm sure RBC won't be the only one upping their ests ahead of the qtr)

- The fact NTAP is starting to be viewed as a takeover candidate. NTAP has been as one of the few major storage players that has been able to grow market share (and revenue) over the past year or so. The larger players like EMC, IBM and HPQ may be feeling a slight sting here.

Barron's is out over the weekend noting current CEO Tom Georgens may be a willing seller (sub required)

http://online.barrons.com/article/SB125452419677460573.html

That should add some fuel to the fire.

NTAP isn't a big mover but up to 1pt of upside may be in the cards here.

PS: Check out Brocade (NASDAQ:BRCD) trading up 18% on some pretty vague takeover story from WSJ.

The Manitowoc Company (NYSE:MTW): Upgrade to Buy: See potential for 5x increase over next 3 yrs - Deutsche

Deutsche Banks is out with a major call on The Manitowoc Company (NYSE:MTW) upgrading the crane maker to Buy from Hold with a potential for 5x increase over next 3 years.

The analyst notes they upgrade Manitowoc to Buy with upside of 45% to their revised $12 target price. Although they have very little clarity on when the crane cycle will recover, the firm does not think this is the right question. They even argue that earnings have less relevance during this bottoming process since the direction of the stock is highly likely to be dictated by sentiment on the health of the balance sheet.

In this sense, they argue that the stability of the Foodservice business and benefit from working capital liquidation can generate significant levels of cash flow and therefore bridge the gap to Crane recovery. In this sense, even if earnings recover to only $2/share by 2013 (note consensus earnings expectations peaked at $4.40 in early-2008), then they think the stock is going to significantly outperform from current depressed trading levels.


Foodservice provides a key anchor through Crane downturn
With good reason, the focus for investors is on the crane cycle but with Crane revenues likely to fall from a peak of $3.8bn in 2008 to a $1-2bn trough, the reality is that the Foodservice division is likely to dominate over the next 12-24 months, accounting for an estimated 45% of revenues and 67% of EBITDA in 2010E. While the convenience restaurant and lodging segments have not been immune through this downturn, with revenues down low single-digit and margins expanding next year (due to M&A synergies and headcount reduction), Deutsche sees MTW’s Foodservice segment as a critical earnings anchor. Moreover, they believe with Emerging Market Crane demand accelerating, they do not believe Crane revenues will fall below the critical $1bn level, where the segment could start losing money.

Covenants could come into play but Deutsche sees key mitigating factors
Under recently renegotiated covenants, Deutsche projects headroom of 24% on the key Leverage covenant in 2009 but project this tightening by the end of 2010 and therefore they cannot discount the possibility of another breach. However, they see potential for $400-500m of trade w/cap to be converted into cash over the next 12- 18 months and sufficient FCF in Foodservice to meet cash interest obligations. When they then consider MTW’s quality end market positions, the firm believes that covenant relief would again be granted by the banks, unless Crane starts bleeding significant quantities of cash flow – a bear case scenario.

Corporate bond yields have declined
substantially for the majority of stocks under coverage, but the decline has been especially dramatic for MTW from a peak of 22% in August to 11% currently.

This reduction in perceived risk has been reflected in the stock’s volatility which has fallen from a high in the 180-190% range to its 12m lows in the 60-70% range in recent weeks. Again this is part of a broader trend but has been especially pronounced for Manitowoc. Note that Manitowoc’s equity volatility is still the highest in the DB Universe but Deutsche sees further scope for its volatility to decline from here.

Notablecalls: I like this one, especially in the ultra s-t:

- Deutsche Bank is calling for a 5x increase in stock price over the next 3 years. That's a gutsy call and will surely get people interested in the name.

- The stock is down over 20% from its recent peak of $10.50.

- There is the covenants issue but looking at the corporate bond yields the market seems to agree with Deutsche here. Covenants are not likely to derail the stock's advance.

- Short interest still stands at 10%. That's not huge but it's still 13M shares NOT happy about Deutsche calling for a 5x-bagger.

All in all, I think this one will trade towards $9 level today. That's 10% upside.

Apple (NASDAQ:AAPL): Upgraded to Buy at UBS; $265 price target - New Street high

UBS is upgrading Apple (NASDAQ:AAPL) to Buy from Neutral from a $265 price target (prev. $170):

Firm notes their positive view is predicated upon expectations for greater "recurring" iPhone hardware revenue (due to a growing installed base & stickiness of the App Store) which should drive more visibility into iPhone sales (20%+ of our FY10 iPhone shipments), as well as continued iPhone expansion driven by new partnerships (end of exclusivities). They also believe upward revisions to consensus ests are likely given underestimated gross margin potential.

Apple service could be the next long term driver
UBS believes AAPL may be working on building out a foundation for a service to provide seamless access & mobility of digital content across all its products. They envision a service that seamlessly allows access to media-focused content of iTunes & user-generated content of MobileMe (pictures/videos/email/calendar) as well as social networking integration from any existing Apple product. Firm believes the service may be the draw (halo) that drive additional future Apple product sales.

Capex hints at build of a potential enhanced service, which UBS thinks could help drive further hardware sales. Capex related to infrastructure & corporate facilities has been ramping, reaching $702 million in FY08 and rising to an estimated $840 million in FY09 from $128 million in FY05. They believe a material portion of this capex may be related to the build out of a data center/network operating center (NOC) which they hypothesize will be the foundation for a service that provides seamless access and mobility of digital content across all its products, at any time, and from any place. Similar to Research In Motion’s, the NOC may also help to reduce network congestion through techniques such as compression & push. UBS envisions a service that will seamlessly allow access to the media-focused content of iTunes (music/video) and user-generated content of MobileMe (pictures/videos/email/calendar) as well as integration with social networking sites from any existing Apple product. They believe the service, in the future, may be the draw to purchase additional Apple products.

New products still on the way
From a new product perspective, one thing is certain, in UBS' opinion – Apple will continue to introduce new products across its product portfolio every year. Determining what those new products will be is a part of the buzz (and fun). Apple’s veil of secrecy will likely continue to create that important buzz and they believe the company’s attention to detail and customer experience will help to perpetuate and maintain its buzz/brand image (the “halo effect”). However, the key question is whether that pace of innovation can continue? From a near/medium term perspective, firm believes a potential data-only product at Verizon (potentially a smart book), new wireless operators and a tablet may be forthcoming. With iPods recently getting a complete refresh and the company making adjustments to its MacBook line, the firm believes Apple could focus on a desktop refresh next.

Raising estimates on back of higher iPhone expectations
Although they are leaving their Sept. qtr iPhone units unchanged, UBS has increased their FY10 estimate to 36mm units from 25.9mm previously. As a result their pro forma rev/pro forma EPS for FY10 increases to $51.6b/$11.08.

Notablecalls: The $265 target is the new Street High, even surpassing Piper Jaffray's $255.

Should generate buy interest.

PS: Note that Morgan Stanley is also out positive on AAPL this morning saying they view broader iPhone distribution as the most significant near-term catalyst for iPhone units, EPS, and share price. This opportunity is substantial – it equates to a potential 20.3M unit and $3.76 adj. EPS opportunity or 100%/41% of the LTM units/EPS. Timing remains uncertain but they believe a near term (2010) opportunity exists in Europe, China & Korea with a longer-term (2011) opportunity in the US.

Morgan Stanley raises their CY10 revenue and adjusted EPS estimates to $45.3B/$10.50 from $38.2B/$10.00 as theynow expect 41.7M iPhone shipments in CY10 up from 38.2M previously. Firm's CY10 EPS forecast is 13% above consensus. Overweight is maintained with $210 tgt (prev. $200).

Catalyst Pharmaceuticals Partners, Inc. (NASDAQ:CPRX): Need help passing a piss test?

While I normally refrain from posting on penny stocks, there's a note out from Rodman & Renshaw that caught my eye. They are commenting on Catalyst Pharmaceuticals Partners, Inc. (NASDAQ:CPRX) after the co announced plans to conduct another study of vigabatrin in cocaine addiction, based on further analysis of the prior failed study.

Rodman notes that as a reminder, in May 2009 the company announced the results from a Phase 2 study of vigabatrin in cocaine addicts. Although on first pass the benefit of vigabatrin did not reach statistical significance vs. placebo across all enrolled patients, upon further analysis the company noted that compliance confirmed via urine tests was substantially lower than reported by patients. Further examination of the patients that actually took the drug revealed a correlation between compliance and efficacy, and the company is planning on leveraging this finding in designing a new trial of vigabatrin in cocaine addicts. It is worthwhile to highlight that a study of vigabatrin in cocaine addicts conducted in a single center in Mexico did show a statistically-significant benefit of vigabatrin. The key difference between the US and Mexican study is that the Mexican patients were treated at a rehabilitation facility, and their drug compliance was monitored periodically. On the flip-side, the US study was conducted across 11 centers, patient compliance was not monitored after the first dose, and patients were not treated in a rehabilitation setting. Catalyst plans to design and conduct a study of vigabatrin in a rehabilitation setting in addicts who are self-motivated to quit. This segment of patients may have a higher compliance, which may help highlight the benefit of vigabatrin.

Management estimates that another study of vigabatrin in cocaine addiction could cost ~$3MM, and the company has several options for financing this study, notably: partnerships, grants, and/or equity financing. Rodman notes they are cautiously optimistic that a study investigating vigabatrin in patients that receive the proper rehabilitation counseling and maintain a high rate of treatment compliance may be able to show the clinical benefit of vigabatrin, and they await a financing update prior to revisiting their timeline and commercial forecasts.

Notablecalls: So why did I find this one interesting?

- You have a ultra small-cap name (market cap $13 million) with a potential cure for cocaine addiction.

- The drug vigabatrin showed statistically significant results in a closed Mexican rehab center.

- Now the company is going to conduct a similar study in the US. This time patient compliance will be monitored after the first dose. This makes the study more likely a success.

I have really no idea how big the Cocaine addiction market potential is but it must be pretty huge. And CPRX just may have a drug that actually works.

Not making a call here but CPRX looks interesting here. Stock is up 22% with in pre market trading (light volume)

Radvision (NASDAQ:RVSN): Cisco goes from a friend to a foe

Radvision (NASDAQ:RVSN) is getting downgraded today after Cisco announced it will acquire Tandberg, a key competitor of RadVision.

- RBC Capital is downgrading RVSN to Underperform from Sector Perform and lowering their target to $7 from $10.

According to the firm, the move will pressure RVSN as the company loses its prime channel partner (~40% of sales) and in essence the former friend is becoming a foe. Furthermore, the move undermines Radvision's positioning and will marginalize its market share. Last, Tandberg deal puts to rest the view RadVision is a natural acquisition target for Cisco; if M&A was to occur as final attempt to salvage value, it would be at lower multiple off a lower revenue base in our opinion. They expect the deal to take a toll on numbers towards spring 2010 and they're directionally cutting FY10 estimates by ~25% Y/Y.

RBC expects sales to diminish in coming 9 months as the deal progresses as distributors and customers will likely wait for Tandberg-powered products and the focus of Cisco sales force will shift.

- Cantor Fitzgerald is lowering RVSN to a Sell from Hold with a $6.50 price target (prev. $11) noting Cisco is RADVISION's largest customer, accounting for about 34% of total revenue in FY:07, 35% of total revenue in FY:06, 27% of total revenue in FY:05 and 21% of total revenue in FY:04. Tandberg is directly competitive with RADVISION and thus they believe that the company's Cisco-based revenue stream is at risk in the intermediate to longer term as a result of the announced acquisition of Tandberg.

Firm notes they have not updated our model to account for this development nor have they had a chance to speak with the management of RADVISION. As such, their price target is simply based on tangible book of $6.52, which includes $6.05 in net cash. They will refine their thoughts regarding valuation once they gather additional details regarding the situation.

Notablecalls: RVSN will get slashed this morning. I don't think there is a trade left here (some lucky shorts got some shares in the $7.50 range) but still something to watch & learn from.

PS: Given the lack of premium (around ~10%) in the Tanberg deal and the fact a major player like Cisco is now entering the space, this can't be good for Polycom (NASDAQ:PLCM) either.

Darden Restaurants (NYSE:DRI): Colour on quarter

Several firms are out defending Darden Restaurants (NYSE:DRI) this morning after the co beat consensus expectations in spite of worse than expected same-store sales (SSS). Stock is down over 2pts in pre market trading.

- Keybanc notes that while the 1Q proved that even DRI is not immune to the top-line pressures that plagued the casual dining industry over the June to August time frame, the firm remains optimistic that the recent quarter will represent a trough for SSS trends for both DRI and the casual dining industry. They are also encouraged by the fact that Darden managed to increase restaurant-level margins by 150 basis points year-over-year in 1Q10 despite the SSS pressures. Looking forward, the firm believes that SSS trends will sequentially stabilize and that the restaurant-level margin expansion will continue. Accordingly, they reiterate their BUY rating and $43 price target and would consider any near-term weakness in shares to represent a buying opportunity for DRI.

- JP Morgan notes that the net takeaway on Darden is that they do not think the story has changed and recommend that investors take advantage of stock declines resulting from overly optimistic trading sentiment into the release. Darden has spoiled investors with much better than industry average results. Moving forward, properly low-set sales expectations (JPM's blended comps estimate remains at down 3% vs. current guidance of down 3% to flat and previous guidance of down 2% to flat) are matched with an increased focus on costs. Darden remains a favorite in casual dining and an Analyst Focus List stock, with a $37 price target (Dec 09) representing a 14x multiple on F10 EPS estimate.

- CSFB seems to be the most cautious firm out this mroning saying EPS of $0.67 beat consensus by $0.01; however, particularly after KnappTrack improved in Aug., comp weakness at the core profit-drivers (OG and RL) was greater than feared, and guidance for the year was tweaked lower. They believe after-market weakness in the shares fairly reflects a more muted outlook at the core profit drivers, and would not be quick to buy on weakness today.

Catalysts: The call is at 8:30 AM tomorrow EDT. CSFB expects shares will open weak on the comp miss and reduced guidance. A plausible explanation behind comp deterioration into August and encouraging commentary on Sep. trends would be required to drive a more positive reaction in the shares.

Notablecalls: If you're in a mood to play bounces in this market I suggest you take a look at DRI.

Call starts at 8:30 AM.

I'm sure it can do $34.50+ if management plays their cards right.

Phillips-Van Heusen (NYSE:PVH): Upgraded to Buy at Merrill Lynch; $54 price target

Merrill Lynch/BAM is upgrading Phillips-Van Heusen (NYSE:PVH) to Buy from Neutral with a $54 price target (prev. $45)

The analyst expects a re-acceleration in CK licensing (roughly 45% of EBIT) will be supported by moderating FX headwinds and the continued growth of the global Calvin Klein brand, led by Warnaco (the largest licensee of CK at ~$2bn in retail). CK’s Fall launch schedule includes: CKJ “Body Jean” (and a strong emphasis on the “skinny” silhouette), “CK Fresh” fragrance, and relaunch of “Euphoria”.

Retail Outlet (40% of sales) trends also improving
Retail outlet comps should continue to accelerate into easing comparisons, with Sept comps up +3 to +4% vs. Aug up +2% (compared to 2Q09 comps down -3% and 3Q09 guid down -2 to -3%). Traffic trends are also improving to down (2)% to (4)% versus prior down (8)% to (10)%. Retail margins should be an opportunity, particularly in 4Q09 (given the lack of clearance inventory). Longer term, segment profitability could be supported by store reduction plans, with a potential to reach 7% to 9% margins (vs. 2009 forecast of 3-4% segment margin)

Moderate is In - Wholesale continues to gain share
Wholesale is well positioned to gain share, as the increasing focus on value for nationally recognized branded product should benefit Van Heusen, Arrow, IZOD. These core brands, priced at value price points of $19.99 to $29.99, should continue to gain share from tertiary brands as well as private label. Merrill anticipates door expansion in these brands, as dep’t stores shift to the more moderate price point brands with an all door rollout of Van Heusen in 4Q09/1Q10. Timberland apparel, positioned as the opening price collection sportswear brand on the floor ($29.99-$39.99), should also gain share, with 600 doors this Fall (from 350).

Notablecalls: PVH is one of the premier retail names and with Merrill Lynch taking their rating to Buy with a pretty hefty price target, the call should garner attention.

Note that Buckingham Research blessed PVH with a Strong Buy last week and the stock is down couple of pts since then. So while Merrill is playing ketchup here I think the buyers will line up.

The market is trading slightly down this morning so I would suggest not chasing PVH in the pre market and would rather look to get long after the open. You get more size & a better price.

Applied Materials (NASDAQ:AMAT): Upgraded to Buy at Citigroup; Added to Top Picks List

Citigroup's Semi Equipment team is upgrading Applied Materials (NASDAQ:AMAT) to Buy from Hold and adding it to Top Picks Live (Citi’s focus list) based on significant new SunFab wins, upcoming cost savings and a renewed focus on silicon share.

Firm notes they are slightly raising 2010 estimates from $0.42 to $0.46. Firm's target goes to $17 from $15 on the addition of a ~$0.20 impact from the restructuring to their former cross-cycle EPS estimate of ~$0.90. AMAT is replacing WFR on Top Picks Live.

Positive Catalysts Align — Based on checks at the Hamburg solar show, Citigroup now believes AMAT is about to sign a significant second wave of SunFab lines including four new lines (~300MW total) in India. While the ultimate success of SunFab remains debatable given how fast pricing is collapsing, the addition of new customers, more clarity on its cost cutting and up to ~$1B savings (mostly focused in sales/service/solar), some undiscovered margin leverage headed into 2010 and its new-found focus on regaining silicon share should be enough to drive the stock higher. Lastly, as the largest equipment provider to the global solar industry, it should benefit from big MW growth in 2010 and simultaneously avoid most of the pricing compression that will continue to plague cell/module makers.

Underperformance Opens The Entry Point — Sentiment remains very poor for AMAT which underperformed the SOXX by ~5% in the past 2wks and ~12% over the past month, meaning that as these catalysts play out, the Street will no longer be able to ignore the stock.

Notablecalls: Ketchup! Remember how FSLR ran on signing the China contracts couple of weeks ago? India is as good as China? Right? Right?

I think AMAT can see some upside o this call..$13.50+ range.

Note that $17 is the new Street high target for AMAT.

Viropharma (NASDAQ:VPHM): Upgraded to Outperform at Oppenheimer

Oppenheimer is upgrading Viropharma (NASDAQ:VPHM) to Outperform from Sector Perform with a $13 target.

According to the analyst the upgrade ise based on on a potential surprise for Cinryze revenues and the generic Vancocin overhang being priced into shares. Importantly, 1) investor focus should shift to the continuing Cinryze launch following the development of guidelines for generic Vancocin; 2) Oppenheimer sees minimal downside should Berinert P be approved, as it would likely not impact Cinryze prophylaxis utilization; 3) they believe VPHM shares are pricing in generic Vancocin; and 4) firm is increasing their Cinryze estimates based on penetration in patients currently receiving prophylaxis steroids.

Cinryze launch in focus; revenues could surprise: Oppenheimer believes 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q09. In their estimate, VPHM has set an achievable bar to beat guidance. They estimate Cinryze sales of $100M versus consensus of $84M during 2009.


ViroPharma introduced 2009 Cinryze guidance of $80-$95M on the company’s 2Q’09 earnings call, which he firm sees as unimpressive, since low end implies flat 2H’09 sales. They believe 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q’09.

Although a generic Vancocin approval would be a near-term negative, they believe investor focus should shift to the continuing Cinryze launch, which could provide significant upside. Based on comments by the company, a greater number of patients being added to Cinryze Solutions are new patients versus those coming from clinical trials. Additionally, the firm notes that approximately 1,500 patients are currently receiving prophylaxis steroid treatment for Hereditary Angioedema (HAE), representing a key switch opportunity for Cinryze given the adverse events associated with steroids.

Not anticipating Berinert P approval; minimal downside if occurs: Although Oppenheimer does not anticipate CSL's Berinert P will be approved, they see minimal downside if FDA grants marketing authorization. Based on FDA's attitude toward Cinryze and Dyax's DX-88 in acute HAE, they do not believe FDA views the acute indication as clinically viable.

Vancocin generic overhang priced in: Firm believes VPHM shares currently reflect the launch of generic Vancocin in early 2010. Importantly, they anticipate FDA will issue final guidance and deny VPHM's Citizen Petition near term, leading to potential ANDA approvals in early 2010. However, they expect VPHM to retain ~$50M in annual branded Vancocin sales longer term

Increasing Cinryze estimates, upgrading to Outperform, $13 PT: Oppenheimer's 2009 Cinryze revenue estimate increases to $100M from $88M, and 2010 to $188M from $159M. Our 2009 total revenue estimate increases to $328M from $304M, and 2010 to $211M from $182M. Their 2009 adjusted EPS increases to $1.64 from $1.44, and 2010 to $0.38 from $0.30.

Notablecalls: Nice little upgrade. The only problem with this one is that it will be bid up too much in the pre-market action. You'd have to pay up 4-5% in hopes of selling the stock up 6-7% later on. If the market turns sour again the 6-7% scenario won't happen, making you (and all the other buyers) look silly.

So, ignore the pre-mkt action, see if it lets you in after the open dip.

Brunswick Corp (NYSE:BC):

RBC Capital upgrades Brunswick Corp (NYSE:BC) to Outperform from Sector Perform with a whopping $17 target (prev. $8).

With liquidity risks now behind it and dealer inventories coming in line, they view BC as a compelling three-year earnings recovery story. RBC's call requires only a 20% demand recovery over the next three years following peak-to-trough decline of nearly 60% since 2005. In the interim, they believe the rate of improvement in profitability and inventory metrics beginning in 2010 will provide reason for optimism, even if demand is slow to recover.

Industry conditions remain extremely tough, but a bottom could be approaching. The firm recently surveyed nearly 150 dealers. While tight credit continues to take its toll, industry demand appears to be stabilizing at a 135K run rate. Meanwhile, inventory levels are also clearly in much better shape, especially for Brunswick dealers.

Brunswick is on the cusp of a demand-agnostic earnings inflection. As the inventory de-stocking cycle runs its course, Brunswick's production should be significantly higher in 2010-2011, even if demand does not improve. With flat demand, they estimate that Brunswick's boat segment revenue will grow 65% and 35%, respectively, over the next two years


What Will Earnings Look Like As This Unfolds?
Given what they know about Brunswick's cost structure, the firm would expect high incremental margins as production comes back. The initial stages of recovery should be especially powerful, as higher sales levels should coincide with cost-reduction efforts coming to fruition.

Brunswick migrates toward 1:1 inventory replenishment, RBC believes the business can generate ~$200M of EBITDA in 2011 without any improvement in demand. Assuming demand ultimately recovers to 150K-200K units (vs. the prior cycle peak of over 300K), they estimate that BC would generate EBITDA of $240M-$620M.

BC shares have significant upside potential. RBC's $17 price target assumes industry demand recovers to the 150-175K range by 2012. They then apply an EV/EBITDA valuation range of 6-8x, discounted back two years at 15%.

The "Wholesale Bounce" Should Provide A Bridge To An Eventual Demand Recovery

RBC notes that typically, they are not big believers in investing around normalized earnings scenarios that can take years to play out. Such theses often prove fickle because few investors are truly committed to an investment horizon beyond 6-12 months. RBC's view in this particular case is different. Given the leverage in Brunswick's model, the rate of improvement in Brunswick's operating metrics should be palpable. A year from now, they suspect investors will see dramatic margin improvement (albeit from a very depressed base) coinciding with extremely favorable inventory metrics.

Notablecalls: This call should create some exitement among investor and inject fear into the short base.

Short interest stands at 12%+ and with the stock likely headed towards a new high shorts are less likely to fight the trend and cover.

The $17 price target seems to be the new Street high.

I see this one trading above $10 level today, with possibly $10.50 (if the market does not roll over)

National Semi (NYSE:NSM): Upgraded to Buy at Citigroup; $23 target established

Citigroup is out with a major call on National Semi (NYSE:NSM) upgrading it to a Buy from Hold with a $23 price target (prev. $18).

National is a strong power management vendor whose management executed well last cycle by divesting non-analog product lines and strengthening its analog product offering. Profitability gains from F04-F08 were impressive, with gross margin ascending to 64% from 50% and operating margin increasing to 25%- 30% from 10%-15%. NSM’s significantly higher gross margin structure last cycle created investor concern regarding future revenue growth prospects. This concern, coupled with immature new product growth initiatives, has created overly negative stock sentiment. Within this context, Citigroup chooses to upgrade NSM for the following four reasons:

1) sector-low investor sentiment and lagging performance should reverse as leverage becomes apparent;

NSM’s 7 out of 23 (30%) Buy ratings now represents the lowest Buy mix in our analog group while its 4 out of 23 (17%) Sell mix is the second highest within the group. Furthermore, sponsorship in the name appears weak, with no upgrades post 9/10/09 earnings despite NSM delivering strong results.


2) stock offers sector-leading gross margin expansion in C10E;

NSM’s fab closures at its China (completed F1Q10) and Texas (targeting F1Q11E) facilities will drive gross margin benefits of ~100bps ($15M annually) and ~400bps ($60m annually), respectively. These fab consolidations along with other cost saving actions will enable NSM to achieve +570bps gross margin expansion in C10E. This positions NSM behind only IRF (+836bps in C10E) and significantly above the analog group average of +326bps GM expansion in C10E.


3) industrial end market, at 40% sales, is underappreciated, in firm's view, and a C1H10 driver based on seasonality and lagging cyclical improvement; and

With ~40% of sales from Industrial, NSM has the 3rd highest exposure in analog group, behind only ADI(~50%) and LLTC (~50%). Recent analog company commentary has indicated a pickup helped by US and European improvement as well as ongoing Asian industrial demand. Notably, the four companies in group with the largest industrials exposure (ADI, LLTC, MCHP, NSM), as a group, have lagged the sector in stock performance over the last three quarters to date by 2.6% (1Q09), 14.2% (2Q09), and 5.2% (3Q09QTD). Citigroup expects this trend should reverse near-term with the expected uptick in industrial activity through C1H10E.

4) fears of share loss to TXN in handsets look overblown, with smartphones a substantive catalyst through next year.

NSM has lagged analog sector performance over the past 6 months in part due to prevalent negative sentiment concerning share loss in wireless to TXN at its largest handset customer, Nokia (11% of sales in FY08). Share loss sentiment appears overblown as growth appears to have stabilized in mid-2009 after experiencing a fall-off in 4Q08. To be clear, Citigroup does see NSM having lost some share to TXN but this has been mostly within lower-end handsets. More importantly,they still see NSM well positioned within the highend
multi mode/feature rich phones.


Citigroup increases F2010E EPS (GAAP) to $0.60 from $0.56 and F2011E EPS (GAAP) to $1.00 from $0.72. Their F10/11E EPS (GAAP) are $0.60 / $1.00 vs. Street’s $0.56 / $0.88.

For F2Q10, they edge up EPS by $0.01 to $0.14 on a 0.7% higher sales assumption of $340M versus $338M. Firm's 2Q revenue estimate implies 8.1% qq growth, is 1.7% above the Street, and marks the top of NSM’s $325M- $340M guidance range.

Notablecalls: This is one gutsy call from Citigroup and will likely get the attention of traders starting from early on.

I see this one trading up 3-5% over the day.

The only problem here is the general market. If the market continues to roll over (as witnessed post FED announcement yesterday) the buyers of the NSM upgrade are going to look silly. That makes NSM a kind of a market bet. I personally dislike these.

Dennis Gartman notes this morning:

'... Today, then, shall be a very important day for the stock market here in the US and then abroad, for if the “reversals” are to be denied, the markets shall have to stabilize and push higher. If we were to open firmer and then fail, the technical damage wrought would be quite serious indeed. As we write, the futures are all trading rather markedly lower, and that means perhaps a “gap” to the downside right from the outset. Let’s please have our protective hats on and have chin straps tightened; this might get ugly!...'

Palm (NASDAQ:PALM): Bidding war to emerge for Palm? Jefferies sees 80% premium

Jefferies is out with an interesting call on Palm (NASDAQ:PALM) saying we could see a bidding war for Palm, could garner c.80% premium. Nokia (NYSE:NOK) mentioned as the main bidder.

Strategic rationale: WebOS as carrot - Palm gives buyer a PC-class OS (WebOS; Linux-based, multi-tasking) and a US-centric high-end handset (Palm Pre) that best mimics iPhone experience (UI) - courtesy of senior Apple staff defections to Palm. Nokia can't compete in US (c.6% m/share) or high-end with Symbian but with another OS (would make 4, or 5 incl MSFT in Noia Netbook) 3rd Party application development is confused to say the least. Palm would have to be run as a separate business near term; 'parallel' roadmaps may take 1yr+ to converge; it could be 2011 before we see a fully integrated WebOS and Ovi services platform in a new form
factor device (tablet?). Meantime, Symbian remains Nokia's workhorse for roadmap designs before being restricted to mid-tier as WebOS supplants in high end.

PC OEMs may create a bidding war - Palm is an opportunity for OEM "escape" from the graying PC market (Dell, Toshiba, Asus, Acer). This could see a bidding war for Palm – Jefferies sees a hefty premium to Palm's current m/cap ($2.4bn; EV $2.2bn). It's much cheaper than Apple (FY'10 1.2-1.3x EV/sales vs. c.3x) but counterbids could see valuations soar; a 3x EV/sales bid would mean $4.3bn or a c.80% premium to current price. Ignoring synergies and assuming 2m handsets/qtr at $250 each and 15% op% they think it may take over 14 years to breakeven on this deal. But the strategic merits would outweigh - this could arguably leave Nokia only 1yr rather than 2-3yrs behind Apple's software development and high end UI, helping retain Nokia's global market share lead (2Q09e c.38%) just as Apple enters China. Palm is already looking to raise cash (pro forma net cash c.$200m after raising $325m) which means a capital injection may not be needed from any acquirer. Add in R&D savings (Nokia spent €3.1bn on device R&D in '08, much of this on solutions and services) and payback shortens. Nokia has €3.2bn net cash.

Taking tablets - With Apple rumoured to launch a 10" screen tablet, MSFT steals its thunder with a prototype two-screen tablet. The mobile computing form factors are fast developing in Nokia's absence. Nokia's proposed tie-up with Intel does not square nicely with a Palm acquisition. An Intel pairing would, in Jefferie's view, likely see new devices on a Linux OS (Nokia's Maemo with Moblin flavours) on top of say Intel's "Medfield" processor sometime in 2011 with volume ramp in 2012 (Apple tablet 4Q09?). However, Nokia could force Maemo onto its own new form factor next year. Yet, little past evidence exists of genuine design innovation at Nokia.

Notablecalls: Selling out would be the only sensible thing to do in Palm's case. They are up against players that are way better capitalized and able to bring new products to market at speeds way greater than Palm. How long did it take for the Pre to reach the shelves?

Nokia is desperate and has the cash. Why not give it a go?

PS: PALM offering priced this morning.

PPS: Not making a call here. The offering was priced at $16.25/share. Absent an offering I would have been all over this one.

Macy's (NYSE:M): Upgraded to Buy from Hold at Citigroup; $30 target

Citigroup is out with an upgrade on Macy's (NYSE:M) to a Buy from Hold. New price target stands at $30 (prev. $15)

Citigroup's Take — Following recent proprietary mtgs. with mgmt., they are upgrading M from a Hold to a Buy rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on $30 price target.

Rationale #1: My Macy’s to Fuel Topline — Citi is encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.

Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on Citigoup's proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, they view this as an investment positive, as a majority of the benefits are ahead of us.

Rationale #3: Upward EPS Revisions Warranted — Firm's previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. They also view mgmt’s ‘09 guidance as conservative. As such, they raised their 2009-2011 EPS estimates and target price for M. Lastly, they raised Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.

As such, Citigroup is raising ther 2009-2011 EPS estimates for Macy’s to reflect:

- More constructive outlook regarding topline and margin benefits from the successful execution of the My Macy’s initiative (benefits begin in 4Q09, biggest impact in 2010);

- Margin tailwinds from product cost deflation (M anticipates more of a benefit in 2010 than this year); and

- Improved sales, margins, and inventory turns from the company’s speed to market initiative and product lifecycle management technology rollout (benefits begin in 2009 and should continue in out years).

They are raising 2009 EPS estimate to $1.30 per diluted share, up from $0.97 previously. The upwardly revised estimate is significantly above Macy’s guidance of $0.70 to $0.80, and above current consensus of $0.91 per diluted share. Raising 2010 EPS estimate to $1.80 per diluted share, up from $1.19 previously and above current consensus of $1.20.

September SSS Estimate Revision (details)
Citigroup is raising September SSS estimate for Macy’s to the range of (-4) to (-6)%, up from (-5) to (-7)% previously, and vs. (-6.6)% last year. Recall, management does not provide monthly SSS guidance, but expects SSS in the back half of 2009 to decline (-5) to (-6)%. Citi believes that Macy’s promotional calendar is a slight positive YOY, as the company’s Labor Day Sale shifted from August Week 4 to September Week 1 last year into September Weeks 1-2 this year. They also note that Macy’s has slightly higher geographic exposure to the Northeast region (~22% of the store base vs. JCP at 14% and Kohl’s at 18%), so that later school start dates this year in many districts was likely more pronounced and favorable for the company this month (shifted sales from August into September).

Notablecalls: Macy's suddenly has a lot going for it:

- Note that Buckingham Research was out upgrading Macy's to a Strong Buy yesterday.

- Citi's price target looks like the new Street high; Previous high seems to have been $24.

- There's a nice qualitative part to the call. That's something rarely seen when it comes to Citigroup research.

- The chart looks OK; Short interest stands at around 9% of float. Should add some fuel to the fire.

All in all, I think M can do at least 5% upside here. I would not rule out a 6-7% over the day if the market continues to hold.

Monster Worldwide (NYSE:MWW): Upgraded to Buy from Neutral at UBS; $27 price target

UBS is out with a rather major upgrade on Monster Worldwide (NYSE:MWW) to Buy from Neutral with a $27 price target (prev. $17).

According to the analyst, recent hiring trends and currency suggest modest upside to near-term estimates, while new search technology could boost 2010. They are raising their Q3 EPS estimate to $0.02, from $(0.03), 2009E to $0.10 from $(0.02), and 2010E to $0.30 from $0.02.

Optimistic About Hiring Demand
US and Europe Monster Employment Indices have shown recent improvement and together are showing sequential seasonally adjusted growth. While unemployment is still high, it is stabilizing, initial unemployment claims are now declining, and the ISM employment surveys have risen to the highest levels since last fall.

Both the US and Europe Monster Employment Indices have recently begun showing seasonally adjusted m/m improvement and moderating y/y declines. The US MEI rose 2.5% m/m in August, well above 0.2% in July, and -0.8% per month in Q2. The 3-month average rose 0.6% m/m in August, an improvement from -0.8% in July and -1.6% in Q2.

The Europe MEI rose 0.3% m/m in August, above -0.3% in July, and well above -3.1% per month in Q2. The 3-month average fell 0.8% in August when weighted for GDP and seasonally adjusted, improving from -3.1% in July, and - 2.6% per month in Q2. Sequential trailing 3-month average growth improved in six out of seven countries in the index.

Trovix Should Boost Competitiveness
UBS thinks Trovix, a new patented search technology, could be a game-changer in how employers view Monster versus its competition. We think this could enable Monster to grow market share while maintaining or increasing pricing. Trovix brings targeted search technology enabling the ranking of job applications, resumes, and job descriptions by the relevance of the search results. This should make for a more efficient and user friendly experience for employers and seekers.

In Q3-08 Monster acquired Trovix, a for $73mm. Trovix is a semantic search technology company focused on developing technology products to analyze resumes and job descriptions by considering key attributes such as skills, work history, and education. The implementation of the technology should enable Monster to provide employers (who pay to post jobs) and job seekers with innovative search capabilities that simplify the recruiting process by providing only relevant and targeted search results. UBS expects Trovix to create a much simpler and more efficient search and match experience for both job seekers and employers. The new resume search enables the employer to search for job seekers with relevant qualifications and then analyzes and ranks the information quickly and efficiently.

Notablecalls: I like this call:

- MWW is kinda of out-of-picture (or forgotten) stock

- UBS' estimates are now way above consensus

- Trovix sounds interesting

- Short interest stands at a cool 12%. You now have a stock about to reach a new high on a tier-1 upgrade. This should make people on the short side quite nervous.

The only problem here is the market as pre market action is way in the red. Yet, I think MWW can overcome this and run nonetheless.

Could be a nice 4-5% (or more) runner here.