Infinera (NASDAQ:INFN): Downgraded to Underperform at Jefferies; losing Level 3?

Jefferies is out with a major negative call on Infinera (NASDAQ:INFN) downgrading the shares to Underperform from Hold and lowering their target to $6.75 (prev. $8).

The analyst notes that in recent days, they have been doing checks on Infinera's business with Level 3.

HAS HUAWEI BROKEN INTO LEVEL 3? Firm's recent checks with industry contacts suggest that Level 3 has been running a long haul WDM RFP process. Moreover, their checks are indicating that Huawei has won the business. Obviously, this has negative implications for Infinera. The equipment vendor is the sole supplier of long haul WDM gear to Level 3. The carrier accounted for 24% of Infinera's revenue over the past year.

WORST CASE FOR INFINERA: THEY LOSE THE BUSINESS OUTRIGHT. In a worst case scenario, they expect Infinera – over time – to lose roughly $75 million in annual sales with Level 3. Of course, any transition would take time. Moreover, Level 3 would continue filling out the installed base of Infinera DTN chassis with new modules. Over time, this revenue stream would dwindle as well.

BEST HOUSE IN A BAD NEIGHBORHOOD? The Level 3 outcome is likely a major step backward in Infinera's revenue run rate. The ugly situation at Level 3 reinforces Jeffco's concerns about the longer term margin profile of the business. They are concerned about the company's ability to translate its technology advantage into interesting levels of profitability.

DOWNGRADING TO UNDERPERFORM... From firm's perspective, it's now difficult to justify a premium valuation while their views on revenue growth and profitability are worsening. With the loss of business at Level 3, it's quite likely that our numbers will come down. They expect to adjust their model after the company reports Q2 tomorrow.

Notablecalls: George Notter and his Comm. Equipment at Jeffco have done an excellent job with their checks. The call should have a very negative impact on INFN's share price today. I'm guessing 10-15% downside.

What I have learned from similar calls in the past is that there is usually money to be made shorting the open. They gap'em down but soon enough sellers return...and take the stock down by another 5-7%.

Canadian Solar (NASDAQ:CSIQ): Oppenheimer calling for a big Q3; target raised to $19

Oppenheimer is out very positive on Canadian Solar (NASDAQ:CSIQ) raising their tgt to $19 from $14 following checks at Intersolar. Firm notes they are growing more positive on CSIQ as they believe high cost inventory has been burned through, units and margins should rebound, and 3Q Street estimates could prove conservative. They remain cautious on the sector overall, but believe CSIQ shares still have room to run.

Intersolar checks. Opco met with companies across the solar supply chain and left feeling more comfortable with 3Q demand trends, but less comfortable with industry ASPs and 2H linearity (4Q should be down sequentially vs. Street expectations, which model-in linear growth). Still, they believe CSIQ's story is intact and feel comfortable with their 5/21 upgrade.

Costs approaching $1.50/watt. CSIQ has burned through its high cost inventory and can now produce modules near $1.50/watt (~$0.90/watt for wafers and ~$0.60/watt for cell/module processing). With this cost structure, CSIQ can price aggressively to gain share while easily maintaining a mid-teens or better gross margin.

Expect a big 3Q; Street conservative. Solar peers are currently running at >70% utilization, yet 3Q Street estimates for CSIQ model-in 45-50%. CSIQ should at least track the industry (or even gain share) due to its better cost/pricing structure; firm sees >30% upside to consensus revenue and expects GMs well above the Street's 11% estimate.

Raising estimates and PT. They raise their 2009 and 2010 revenue/EPS estimates to $476M/$0.28 and $655M/$1.04 vs. consensus at $454M/$0.05 and $634M/$0.80.

Notablecalls: This call should generate some further upside in the CSIQ stock.

PS: Wanted to add that I think there are a lot of shorts in this one and they are likely to feel some heat...thinking CSIQ can go to $13.50 or even $13.85 if it really gets out of their hands.

Note that Nomura is out upgrading CSIQ to Buy this morning.

Esterline Technologies (NYSE:ESL): Upgraded to Outperform at Credit Suisse; $43 tgt

Credit Suisse is upgrading Esterline Technologies (NYSE:ESL) to Outperform from Neutral while raising their tgt to $43 (prev. $32).

While ESL has strong breadth across the typically late-cycle aerodefense market, the firm thinks its 18% sales (higher % for EBIT) exposure to comm’l aftermarket will allow it to benefit from the nearer-term recovery in spares demand that they anticipate in 2010. Thus the firm sees a single down EPS year in ‘09 as ESL’s diverse markets and acquisitive strategy should drive growth thereafter.

A Volatile Chart: The Feb. sell-off to $20 traces to an abnormally soft FQ1 (Dec) of $0.38 which startled investors following 8 prior qtrs averaging $0.93 (albeit w/ volatility). The mkt rightfully questioned ESL’s $3.70-$3.90 FY09 guidance after it delivered only 10% in FQ1. However, since then, airline traffic seems to be near bottom, and markets are now considering longer-term earnings pwr. With a more typical FQ2 report of $0.85 in May and an adj. in guidance to a more reasonably achievable range of $3.00-$3.20, the shares rallied quickly to above $30 on 6/5. Credit Suisse sees the recent pull-back to $26 as a good opportunity to get more involved.


Diversified Supplier w/ Global Reach: Aero spares comprise ~35% of revs (w/ higher margins), & they expect comm’l spares to recover late this year or early next. In military, ESL has solid int’l exposure of 10-15% offering diversity away from a slowing US DoD budget. Regarding recent U.S. defense cuts, Sec. Gates clear support for JSF (>$1M content/unit) trumps any negative news elsewhere (e.g. A400M).

New $43 TP: Today, ESL is CSFB's least expensive aero name w/ a P/E of 8.4x (CY09) & 7.3x (CY10E) & EBITDA multiple of 5.6x & 5.3x, respectively, offering a discount to peers of 12-28% . As well, the B/S is solid w/ net debt at 28% & FCF yield of 11%. Firm thinks the days of trough multiples (10x) on trough earnings are over as the mkt gains visibility. Thus, they expand out target multiple to the more historically normalized 12x for ESL’s comm’l aero (40% of total) and industrial ops (20%). For the defense biz (40%), which has sufficient int’l retrofit exposure to outpace U.S DoD budget growth, teyapply a slight premium of 10% to the 11x avg the firm uses for Pentagon-dominated peers, yielding a new TP of $43.

Notablecalls: This is a pretty gutsy call from CSFB's Aerospace & Defense team. They are basically saying commercial air traffic will recover...which is kind of suspect.

I checked with my aero/def analyst contact this morning and all he had to say was that this sure is a gutsy call. He calls the valuation interesting but notes the '..earnings stream is incredibly lumpy and they will leave you hanging as they don’t give any guidance...'

So there you have it.

I think ESL will trade up considerably today based on this call but is it really investable? Guessing 5-6% upside.

Brigham Exploration (NASDAQ:BEXP): Upgraded to Strong Buy from Underperform at Raymond James

Brigham Exploration (NASDAQ:BEXP) is getting very positive comments this morning after the co last night issued an operations update and announced that the Strobeck 27-34 #1H well came online with an initial rate of 2,021 boe/d from the Three Forks/Sanish (TFS) zone:

- Jefferies notes the first of three wells scheduled for completion this summer achieved a new record for BEXP ... it is also the second highest Three Forks Sanish (TFS) test in N Dakota. The Strobeck 27-34 (63% NRI; Mountrail County) flowed 2,021 boepd during the first 24 hours from the TFS. BEXP's prior record was 1,433 boepd from the Bakken. The highest report TFS test is XTO's (XTO, $35.85, Buy) Boucher 41X-21 well in Williams County at 2,571 boepd.

Demonstrates that longer laterals, more frac stages is working ... the Strobeck is 3 miles away from BEXP's Adix well which tested 892 boepd from the TFS from 11 frac stages in a 5,500' lateral. The Strobeck was completed with 20 frac stages, but 18 are effectively stimulated, in a 9,000' lateral. In effect, BEXP achieved more than double the production with 50% more frac stages. Also, the Strobeck well will be accretive to '09 reserves and will benefit from PUD-recognition. Last year the company booked only 4 million barrels in the Bakken, representing 17% of total reserves. Firm estimates that Strobeck's reserves would approximate 600 - 700,000 barrels if first month production averaged 600 bopd. This is possible considering the high initial production rate. Add in the two offset locations, even with a haircut, and Bakken reserves could be up 30% from this test alone. A 600,000 barrel well would achieve 25% threshold returns at $50 WTI assuming a $7 basis differential and $6.6 million well cost.

Next two catalysts imminent ... Jefferies expects to hear results from the Figaro 29-32 #1H (75%) in the Rough Rider area and possibly a second well in Mountrail County, the Anderson 28-33 #1 (55%), by the earnings call in the first week of August. Both wells will have 9,000' laterals and will be stimulated with 20-24 frac stages. Stimulation is scheduled for the Figaro in late-July and the Anderson in early August. Both wells would be accretive to '09 reserves.

"Rough Rider" delineation underway ... the Figaro is particularly important because it is in the largely undeveloped area West of the Nesson Anticline, where BEXP has one-half of their ND Bakken acreage.

Reiterates Buy and $6.50 tgt on BEXP.

- KeyBanc notes that while they believe it is more important to see how this well will produce over time, they expect the wells' IP to grab investors attention, as it is one of the strongest TFS wells to date (although a 20 stage frac was put into the well). They expect this to be a positive read-through for other TFS players, including Whiting Petroleum (WLL-NYSE), Continental Resources (CLR-NYSE), Encore Acquisition (EAC-NYSE), Newfield Exploration (NFX-NYSE), Kodiak Oil & Gas (KOG-AMEX) and XTO Energy (XTO-NYSE) - to name a few.

Couple of other wells to watch for. In addition, later this month, the Company plans to complete the, Figaro 29-32 #1H well, located in McKenzie County, ND. This long lateral Bakken well is expected to be completed with 20 isolated fracture stimulations. BEXP has also commenced drilling of the Brad Olson 9-16 #1H well, located in Williams County, ND in BEXP's Rough Rider Area. This well will be drilled to a total depth of 20,000 feet and is planned to be completed with 24 frac stages. Firm notes that this well is estimated to cost $6.25 million to drill and complete. In the Rough Rider Area, the Company controls ~100,345 net acres.

- Last but not least...Raymond James is upgrading BEXP to Strong Buy from Underperform.

Notablecalls: I think BEXP will have 25-30% upside in it today (close to a full point)

Positive news + similar catalysts on the horizon for the next couple of weeks. Nice combo.

Goldman Sachs (NYSE:GS): Upgraded to Buy at Meredith Whitney Advisory Group

Meredith Whitney Advisory Group is upgrading Goldman Sachs (NYSE:GS) to Buy with a 12 month price target of $186.

Firm notes their more bullish outlook on GS shares is deeply rooted in their sustained bearish stance on the US economy and state of US financials at large. Specifically, they expect a tsunami of debt issuance from federal/sovereign, state, and local governments ramping up debt issuance to fund woefully underfunded budget gaps. In addition, they expect corporate debt issuance to be at least 60% as strong as peak cycle levels reflecting sizable debt maturity rolls. What’s more, given fewer market players, not only is GS benefiting from market share gains on these products but more widely in derivatives products.

To be clear, the firm notes reasons for liking GS stock today are drastically different than any they have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global GDP. While that may still hold true down the line, their thesis today is that they expect GS to be the key competitor in some of the most unpredictable markets: government, corporate, and municipal debt. With those markets, GS handily layers on its suite of derivative products. For that, they expect GS to earn roughly a 16% ROE through 2011. Using those modest return hurdles, the firm derives estimates that are roughly 30% higher than Street consensus and a 12 month forward book value per share in excess of $124. Firm's price target is based upon a combination of a 1.5x multiple to forward book value as well as a 9.5x multiple of 2010 estimated EPS.

Notablecalls: Meredith is well, Meredith...hate it or love it..the mvp of Wall Street. She comes out and upgrades GS just one day before earnings. You have to love her for it.

How high will the stock trade today? $146-148 range? Sure. Why not!

NY Times is doing their best to push GS as well

Dana (NYSE:DAN): Upgraded to Overweight at Barclays; $3.50 target

And now for the small-cap of the day:

Barclays is upgrading Dana (NYSE:DAN) to Overweight from Equal Weight while raising their price target to $3.50 (prev. $2)

Firm notes they are upgrading DAN to OW, reflecting growing confidence that DAN will be able to avoid breaching its debt covenants, enabling investors to focus back on the fundamentals and recovery earnings power. DAN has solid liquidity, but the stock's valuation has been impacted by a large perceived risk of breaching covenants, which would allow its lender group to push the company into Chap 11.

While the firm does not forecast any meaningful volume recovery in the near-term, they expect a material rebound in earnings starting in 2Q09, driven by DAN's deep cost actions taken earlier this year, as well as a pick-up in Ford's production levels. This improvement, combined with the recent buyback of 10% of its debt, should enable DAN to clear its covenants.

Unlike AXL, DAN has not filed an 8-K indicating negotiations with its lenders, which should be a sign that DAN was in compliance as of June 30. This implies a solid 2Q EBITDA, which reinforces that DAN can stay in compliance for the year.

Notablecalls: Suspect 20%+ upside today may be in cards. AXL kinda worked, didn't it?

MEMC Electronic (NYSE:WFR): Upgraded to Buy at Citigroup; Added to Top Picks Live

Citigroup is upgrading MEMC Electronic (NYSE:WFR) to Buy from Hold and adding the stock to Top Picks Live with a $24 price target (prev. $16).

According to Citigroup, checks suggest pricing in its highly leveraged semi business has reached a key inflection and it is starting to reap meaningful cost reductions in its poly operations. While solar poly prices should remain under pressure through 2H:09, this has become broad consensus, meaning stock will move well before poly price increases occur (likely in mid-2010). F2009 from $0.16 to $0.34, F2010 from ~$1 to $1.34 and tgt $15 to $24 on ~15x C2010e + cash. See ~$12-13 replacement value for WFR’s assets or just 20% downside.

- Pricing headwinds starting to ease — Checks suggest 300mm wafer price of ~$90 (down from ~$125 entering ’09) now near all-in cash cost of ~$80-85 finally driving some supply rationalization + price inflection. They estimate WFR’s solar biz is run-rating EPS ~$0.60-0.80/yr despite poly pricing pressure, so all we need is for semis to stop losing money and a better semi pricing environment + supply rationalization should key this move.

- Near-term solar remains tough, but results solid and WFR as well positioned structurally as FSLR — Citigroup sees FQ2:09 (Jun) results at least in-line and likely better while margins at module makers have yet to bottom. They remain cautious on solar, but they think the Street will increasingly see a story here where sustainable margins and returns for WFR are similar to FSLR at a fraction of the multiple. Additionally, while it is taking some time, WFR is working with solar contract customers to extract concessions that may enable an asset-lite move downstream that would drive lower project IRR and share gain.

Additionally, one might expect poly prices to come down further in reaction to recently plummeting module prices. Indeed, firm's work on poly and module prices shows that module prices have generally led poly price declines. While this is a risk, it is quite simply consensus and even if it were to occur, the firm estimates WFR would still make ~$0.10/Q in each of CQ3 and CQ4.



As Street numbers have continued to march lower, Citigroup has been building a case that they wanted to get more positive on the solar sector at some point in 2H:09. While they don’t think it warrants that broad call yet, they feel WFR certainly has the best leverage of any mainstream solar play and they can make a structural case that is in the same ballpark as FSLR in terms of its flexibility and ability to gain share over time with a combination of cost advantages and sustainable cash flow. To that end, WFR is in the unique position of being able to fund continued poly capacity expansion from current cash flow (estimate it is run-rating ~$0.60-0.80/yr in the solar business) and all we need is a better semi pricing environment to lift some of the drag on overall earnings of the company.

One can build a case that sustainable gross margins are similar to FSLR

Over the longer term, WFR’s superior balance sheet versus its poly peers provides significant financial flexibility as it starts to create value downstream and take market share. To see this, Citigroup uses the example of a downstream module provider buying wafers at markup and selling modules into a project as compared to WFR selling in at cost. It is hard for them to see a sustainable situation where poly would sell for <$50/kg since broad grid parity is achievable in most regions at the $2.25-2.50 installed cost level. Assuming balance of system of ~$1.00 this means modules can sell in the $1.25-1.50 range sustainably. World-class non-silicon costs are already in the ~$0.65-0.70 range which, assuming module providers – which are basically just like EMS companies – are willing to take 10-15% gross margins long term, this leaves ~$0.50-0.60 for the wafer. Assuming tolling costs come down to ~$0.25-0.30 which even seems high, this leaves ~$0.25-0.30/W for the wafer. At ~5-6g/W this implies a poly cost of ~$50-60/kg. So, if WFR can make poly for ~$30/kg and sell it for $50-60 this implies sustainable gross margin in the 40-50% range, or not dissimilar to FSLR.

Notablecalls: Certainly an interesting call from the Citigroup Semiconductor Equipment team. Note the call comes only two weeks after JP Morgan downgraded the stock to Underweight (see archives) saying more and more poly capacity is coming online.

The whole WFR situation kind of likens to what the DRAM industry experienced over the past couple of years as Asian players kept adding capacity pushing gross margins to negative (!) range. While I'm not sure we will see negative GM's in this space, Citi may be somewhat early with their bottoming call. These things tend to take time.

So while the upgrade looks groovy and will probably work in the short-term (I'm guessing 5-6% upside today), I'm not entirely sure WFR warrants an investment here.

Meow!

American Axle (NYSE:AXL): ACTIONABLE CALL ALERT

Buckingham is out with a major call on American Axle (NYSE:AXL) reiterating Strong Buy and a whopping $9 target on the name:

- Firm believes AXL’s recently extended credit agreement is the first step in a more permanent re-negotiated credit facility. they believe the company could be granted a revised credit facility that will result in higher borrowing costs, but could also extend the company’s current maturities.

- They believe it is highly likely that management drew down most (if not all) of its available revolver credit facility during 2Q09. AXL’s credit facility is expected to step-down to $370M (from $475M) in April 2010, and as a result the company will have a $105M debt maturity in 2Q10 under the current credit agreement.

- Based on firm's quarterly liquidity analysis, they believe AXL has adequate liquidity to survive beyond its 2Q10 debt maturity (assuming the revolver is fully drawn). At the end of 2Q09, AXL had $280M of liquidity.

- They believe GM could provide some financial assistance to allow AXL to avoid a formal bankruptcy filing. Given the troubles that GM had with Delphi since they filed for bankruptcy in 2005, they believe GM will be reluctant to see AXL follow down the same path, especially given GM’s expected emergence from bankruptcy and production ramp-up of its most profitable full-size trucks.

- Firm believes management elected to draw down the remaining portion of its credit facility, as it bolsters its chances of getting a revised credit agreement.

Additionally, the analyst notes they would argue that AXL is a much more important auto part supplier to GM, as it produces axles for GM’s most profitable vehicles, full-size trucks. Once GM emerges from bankruptcy, they believe GM’s success is still reliant on the production of GM’s full-size trucks, as the Automotive Task Force and GM’s executives are well aware of this fact.

They believe once the “New GM” emerges from bankruptcy, which could be as early as this Friday, AXL’s re-negotiated credit agreement could shortly follow. Firm believes AXL could likely rally with the announcement of its extended credit agreement maturities. At which point, they believe management could evaluate the possibility of improving its capital structure through the issuance of equity and/or convertible debt.

Notablecalls: I'm going to call this one ACTIONABLE LONG IDEA. This one could zoom higher by 20-30% as soon as today on this call.

No firm covers autos or auto parts better than Buckingham Research Group.

Varian Semiconductor (NASDAQ:VSEA): Upgraded to Overweight at Barclays Capital

Barclays' Semi Capital Equipment team is out positive on the space saying they expect the SemiconWest trade show next week will spark renewed interest in semi equipment stocks and they recommend investors increase exposure to the group. Firm looks for growing visibility to double-digit Q/Q order growth through 2009 and that this will lead to strong earnings revisions ahead. They expect growing confidence of increased spending from Samsung and Hynix and that this will be a major catalyst for shares.

- Varian Semiconductor (NASDAQ:VSEA) is upgraded to Overweight from Equal Weight with a $35 price target (prev. $26).

The key drivers for the upgrade include: 1) They expect a beat on the Sep Q guide; 2) VSEA has a strong core franchise aided by aggressive cost cuts; 3) Firm sees visibility to growth from adjacent opportunities by 2011; and 4) the company has strong leverage to memory makers, which they believe will be the key incremental order driver in 2H09.

Expect a Beat on the Sep Q Guide
While Barclays expects June Q results to come in in-line with expectations, their checks suggest that continued foundry spending coupled with a modest orders from memory makers should drive Sep Q guidance of $90-100M, above consensus of $86M and near the company’s new breakeven level of ~$100M (vs. consensus EPS of -$0.10). This is a significant accomplishment for a company perceived as a “capacity driven” name, with limited leverage to the current tech buys. And with momentum continuing into Dec Q as well driven by memory, they see high likelihood for consensus estimates to head higher following the earnings call.

- KLA-Tencor (NASDAQ:KLAC) is also upgraded to Overweight from Equal with with a $32 target (prev. $25)

Near-term, they expect a strong beat and raise when KT reports. For June Q, the firm now models revs/EPS of $310M/-$0.08 (cons $299M/-$0.16). And supported by orders at high end of guide or better ($330+M), they look for mgmt to guide to much better Sep Q - they model $340M/$0.04 (cons $317M/-$0.08). Importantly, the firm looks for KT to be first lg cap eqpmt maker to reach B/E results.

Medium to longer term, they envision 4 drivers behind outperformance relative to WFE - 1) memory move to copper, 2) self-aligned double patterning, 3) adoption of high-k/metal gate by foundry/memory, and (iv) ongoing NAND shrinks.

Layer in aggressive cost cutting, and the firm sees $2.00 in earnings power in 2011, their new normalized EPS estimate. This in turn drives new price target of $32, suggesting 25+% potential upside from current levels.

Notablecalls: VSEA is my favourite of the two, despite the fact we have also Soleil upgrading KLAC today (to Buy from Hold).

I think both of these will enjoy 3-5% upside today (depending if the market will hold up).

Research in Motion (NASDAQ:RIMM): BlackBerry sales declined in June at AT&T and Sprint - Piper

Piper Jaffray is out somewhat cautious on Research in Motion (NASDAQ:RIMM) saying their checks indicated BlackBerry sales declined in June at AT&T and Sprint due to increasing smartphone competition, as BlackBerry sales appeared to lose share to the Palm Pre at Sprint and the new 3GS iPhone and older $99 iPhone at AT&T. BlackBerry sales at T-Mobile remained solid, but Verizon sales were slightly weaker following the termination of the BOGO promotion.

Increasing Competition – Remain Neutral: Firm believes the Palm Pre and iPhone products will remain popular with consumers and we anticipate increasing smartphone competition with additional launches in 2H09 such as the G2 at T-Mobile in August, and several mid-range smartphones from LG, Nokia, Motorola and Samsung in the upcoming months. As such, they anticipate increasing smartphone competition in 2HCY09 could result in RIM struggling to maintain its current market share and margin levels.

Notablecalls: While it shouldn't come as a surprise that the Pre and 3GS iPhone launches dented BBerry sales, the chart of RIMM looks broken.

On the other hand some of this has been discounted by the recent slide from $85 to $66. This makes the scenario of down-bounce-and further down most likely in my book.

Not making a call here but thought you should know.

Dryships (NASDAQ:DRYS) : Upgraded to Outperform at CSFB; $8 target

Credit Suisse is upgrading Dryships (NASDAQ:DRYS) to Outperform (previously Underperform) and increasing their target price to $8 (previously $5). Firm believes DRYS rig assets are being ignored by investors. While they expect oil prices to remain volatile, the recent oil price surge should help DRYS secure contracts for its speculative drillships which should in-turn help DRYS secure financing on its two un-financed drillships. While the timing of any new rig contracts remains uncertain they expect DRYS to fix 1-2 rigs on long term contracts later this year.

- They caution DRYS is not for the faint of heart and concerns remain about future equity issuances. DRYS raised $1.1 billion over the last 6 months (more than quadrupling its share count) and while highly dilutive it put DRYS balance sheet on stable ground. It is possible DRYS may tap the equity markets later this year, but do not expect it barring an acquisition, as they expect its shipyard to partially defer this years’ rig installment payments.

- Two Potential Catalysts for DRYS – Good and Bad. The positive catalyst for DRYS would be a fixture(s) for its newbuilding drillships. The negative catalyst would be a dilutive transaction for existing shareholders – this could be an equity issuance or a cancellation of existing newbuildings that results in payments of cash or shares to the selling party.

- Dry Bulk Freight Rates Softening– But Expectations are Low. Shipping is a demand driven story and the recent surge in freight rates has been driven by China’s thirst for iron ore. While CSFB expects Chinese iron ore imports to tail off in the back half of the year a pick up in demand from Other Asia or Europe could help off-set a potential slowdown in China.

Baltic Dry Index Off YTD High, But…
With the Baltic Dry Index trading over 3,000 and closer to its year to date high (4,291) than low (773), the firm expects the BDI to move lower heading into summer as port congestion in China unwinds, newbuildings are delivered, and China pulls back on its iron ore imports. Over the last few years DRYS has exhibited a strong correlation to the BDI – however, more recently the relationship between DRYS and the BDI has broken down. Over the last 6 months DRYS has exhibited a negative correlation to the BDI. This is not overly surprising given the volatility in the equity markets combined with DRYS ATM equity issuances in which DRYS raised roughly $1 billion in equity in at the market transactions.


Increasing Target Price to $8 (previously $5)
The $8 target price represents 60% upside potential from yesterday’s close. The $8 target price is based on our 2010 EBITDA estimate of ~$585 million and a ~6.5x EV/EBITDA multiple. O6.5x 2010 EBITDA multiple is a blended average of dry bulk comps (6.0x- 7.0x) and offshore driller comps (5.0x-6.5x). Following the completion of the last ATM equity issuance we estimate net debt at $1.5 billion and a share count of 258 million. Additionally, CSFB's $8 target price represents a 30% premium to DRYS NAV. DRYS dry bulk comps are trading at premiums to NAV ranging from 10% to over 100%.

They are increasing their 2009 EPS to $1.15 (previously $1.08) and 2010 EPS estimate to $1.09 (previously $1.01). The 2009 EPS revision was driven by increases to day rate estimates for the Panamax spot fleet. They expect the Panamax spot fleet to average roughly $16,000/d for the full year 2009.

Notablecalls: I think this is a fairly major call on CSFB's part. It sure rhymes with what Alcoa (NYSE:AA) CEO had to say about China yesterday.

Believe a 6-10% move may be in cards today for the dryshipper.

Dryships (NASDAQ:DRYS): Upgraded to Outperform from Underperform at Credit Suisse

Think I'm first one to break this one...Briefing, Fly, Street Account nor even TTN have it.

Target raised to $8.

More to follow.

Should be a mover.

XL Capital (NYSE:XL): Upgraded to Outperform at Credit Suisse

Credit Suisse is upgrading XL Capital (NYSE:XL) to Outperform from Neutral while raising target to $18 (prev. $13).

Analyst notes they are upgrading XL for 2 reasons:

- 1. Improving fixed income markets should lead to a strengthening capital position. CSFB believes it is unlikely that the company will raise capital even if fixed income markets deteriorate significantly.

- 2. Firm believes that XL's Franchise is stabilizing with lower top line declines going forward and underwriters continuing to maintain pricing discipline. In their view, a stronger capital position and stabilization in the franchise could lead to the removal of the negative ratings outlook by rating agencies in 6-12 months which should lead to an improvement in valuation from distressed levels as investors focus more on book value growth rather than the company's survival. As fixed income markets improve over the longer term, XL Capital’s book value should grow 50% due to reversal of unrealized losses, significantly faster than other less leveraged property casualty insurance companies.

CSFB increased their price target to $18. This is mainly driven by a higher valuation as investors get more comfortable with XL’s capital position and franchise stability. They acknowledge that XL is a riskier stock than many P&C and life insurance peers and their price target implies the stock can trade at 60% of 1Q10 book value excluding AOCI, a significant discount to the median P&C and life insurance stocks which trade at 86% and 67% of BVPS ex AOCI respectively. With the capital position stabilizing and the risk of a capital raise more remote, they believe investors will value the stock based on the burned down value of book value including AOCI.


50% upside to book value from potential reversal of unrealized losses: The company has $4 Bn or $11.70 per share in net unrealized losses on the balance sheet, or 78% of GAAP book value. CSFB estimates that $1.4 Bn could turn into realized losses over the life of the investments, implying that book value could grow a further $7.50 per share or 50% from 1Q09 levels as unrealized losses reverse over time.

Excess liquidity: Firm estimates the company has $2.4 Bn of excess cash and short term investments on the balance sheet which they believe is used to support the $4.7 Bn in risk assets. This implies the company will not be forced to sell risk assets at distressed prices. Also, as the risk assets roll off or recover in market value, they believe the company can put the excess cash to work in higher yielding investments which should help EPS by $0.07 per share.

Notablecalls: The sentiment in XL is getting stronger by day. Yesterday we had FBR Capital Markets team raise their target on XL to $17 from $12. The stock gapped up but failed to see any follow-through. I think CSFB's call is more powerful and will help to retrace at least some of yesterday's losses, if not more.

I think a 6-7% move may be in cards for XL today.

Hess Corp. (NYSE:HES): Upgraded to Overweight with a $75 target - Barclays

Barclays is out with an interesting call on Hess Corp. (NYSE:HES) upgrading the shares to Overweight from Equal weight and maintaining their $75 price target.

According to the analyst the upgrade comes following recent sharp underperformance. As one of the most oil-levered producers within their research universe, they believe Hess is well positioned to benefit from a rising oil price environment while offering a significant exploration potential upside with no sizable upfront premium.

Firm notes that although they have long been intrigued by the company’s vast long-term resource potential in Brazil, Ghana, Libya, and Australia, they were uncomfortable about the shares’ valuation. They believed the market had prematurely awarded too much premium for its exploration potential and ignored the unavoidable underlying risks associated with such a concentrated high-interest/high-impact drilling program (dry hole is the norm, not the exception, in the E&P business. The success rate for the worldwide-ranked wildcat exploration only averages about 15%–20%). As a result, despite their bullish medium-term outlook of the crude oil market and Hess’s status as one of the most oil-levered names within firm's research coverage, they maintained they their Equal Weight rating on HES when they upgraded SU to Overweight in mid-February. In addition, they were concerned that the stock could be negatively affected over the near term because of its lack of visible near-term production growth, poor earnings visibility, and the absence of concrete positive
exploration news flow.

So Why Now?

Recent Underperformance Created Buying Opportunity

Unsurprisingly, the stock’s recent poor relative performance has largely eliminated its once hefty exploration premium. Firm now estimates the stock may have included less than a $5 per share premium for future exploration potential, compared with an estimated premium of $18–$19 per share in late May/early June before the BM-S-22 second well bad news surfaced, providing an attractive entry point for longer-term-oriented investors, in their opinion.

In addition, reflecting the current stronger-than-expected oil price environment, they raised their 2009 and 2010 oil price assumption to $57 and $75 per barrel from $50 and $70 per barrel, respectively. Accordingly, they raised their 2009 and 2010 EPS estimates to $0.50 and $3.45 from previous forecasts of a loss of $0.15 and a profit of $2.55, respectively.

Notwithstanding the recent disappointing drilling result at its BM-S-22 block, the firm thinks the Hess’s five key exploration prospects (BM-S-22, Brazil, Cape Three Points, Ghana, Area 54, Libya, Carnavon Basin WA 390P, Australia, and the West Mediterranean Block 1, Egypt) could likely fetch far more than $1.6 billion even under today’s relatively challenging financial market conditions. At less than a $5 per share premium, investors are now getting the BMS- 22 essentially for free, providing a very attractive risk/reward ratio.

Notablecalls: This looks like a very sensible call on Barclays' part. They had the right mind not to participate in the BM-S-22 frenzy and are upgrading now that everyone else seems to have tossed the towel.

There is one more interesting point to their call. The analyst Paul Cheng notes it has been confirmed by Petrobras that ExxonMobil has offered to sublease the West Polaris drillship to Petrobras for the next few months. This suggests that XOM does not plan to drill a third well this year, which unavoidably calls into question whether XOM may be calling a time out because of the block’s poor performance.

Although the shares could potentially experience additional near-term pressure as the company and its partners wrap up the side track well within the next several days (the rig is currently expected to be moved off the block within the next 10 days), they think the bulk of the bad news is now reflected in the stock and the shares’ relative downside risk from here should be limited. They expect strong support at $45–$48 per share and they would be buyers here.

Importantly, although they are disappointed by the BM-S-22 result, the block is substantial, roughly equal to half the size of Rhode Island, and it is too early to write off its potential.

So, Cheng pretty much highlights another possible trading opportunity in HES. If indeed we get press reports (or possibly a PR from XOM/HES) saying they are taking a time out on BM-S-22, the shares are very likely to bounce hard following any downside reaction.

All in all, I think HES will trade up 3-4% today on this call, surpassing the $50 level once again.

FormFactor (NASDAQ:FORM): Upgraded to Outperform at Oppenheimer; $30 target

Oppenheimer is out with a significant call on FormFactor (NASDAQ:FORM) upgrading the stock to Outperform from Sector Perform while raising their tgt to $30 (prev. $22).

According to the analyst the upgrade is due to checks confirming that FORM is now seeing the whites of the eyes of an order recovery, courtesy of 1) massive equity/debt financing by DRAM chipmakers and 2) a snapback in DRAM R&D spending to correct for under-investment the past 4 quarters. Specifically, their checks indicate that FORM recently gained visibility on a 3x sequential uptick in wafer probe card orders from its largest customer, Elpida, for Q3 (Sept). Also, FORM is strongly positioned to regain share at Samsung and Inotera/Nanya for DDR3 wafer probe cards in Q4. Raising FY09/10 ests ever so slightly, but the key to their call is strengthening visibility, likely leading to cash flow break-even or better in Q4.

- FORM has suffered the past 1-2 years from a knockout combo of 1) an oversupply cycle for memory (DRAM/NAND) chips, 2) market share loss, and 3) massive (~50% in some cases) ASP erosion. Oppenheimer's call in upgrading FORM to Outperform is that there is meaningful visibility for a recovery in all 3.

- Firm's checks indicate FORM has 1) received a ~25-unit wafer probe card order from Elpida in June, stabilizing its outlook for Q3 for rev +10%-20% Q/Q, and 2) gained visibility from Elpida for a ~90 unit follow-on order in July. With shipments starting in Sept, they see the biggest benefit to revenue in Q4.

- With big orders from Elpida, they forecast Q4 rev to hit $50M or more. With mix shift toward high-end DDR3 product, and ~10%-15% reduction in materials cost from suppliers in Q2, visibility on cash flow break-even or better financial results in Q4 has never been more certain.

- Given that rev recognition of Elpida orders primarily falls in Q4, they are lowering their Q3 est, but raising Q4--net/net, FY09-10 ests are only marginally moving up to ($1.70)/($0.80). Based on checks, Q4 rev likely will only continue to strengthen, with pending orders for DDR3 share wins at Samsung, and Inotera/Nanya.

Notablecalls: Certainly a major call from Oppenheimer. I like the fact the upgrade is based on channel checks and not valuation (which is low anyway. For a good reason of course as FORM's performance has been lumpy at best).

Visibility is something the market will appreciate in FORM's case and will likely reward with some nice upside.

Note that Elpida is FORM's largest customer (accounting for 71% of total rev in Q1:09).

I'm guessing 5-7% upside will be in store today for the stock (unless the market crashes again).

Illumina (NASDAQ:ILMN): Defended following a negative pre-announcement

We have several firms out defending Illumina (NASDAQ:ILMN) after the co pre-announced 2Q results after the close and expecting revenues to be ~$161 MM, below prior guidance range of $168-173 MM. The miss was largely attributed to weakness in the array business: 1) Slowdown in GWAS as researchers await new content; 2) Softness in Foundation funding; & 3) Order delays (sequencers) as researchers are uncertain about grant money.

- Deutsche Bank reiterates Buy noting ST volatility does not reflect any change in fundamentals, which remain strong. ILMN est. that $10-15 MM of rev was impacted by delays in 1H’09, with some volatility expected in 3Q as well; however, stimulus benefit should make for a strong 4Q’09 (sequencing). Also, data from 1000 Genomes \should reinvigorate array growth in mid FY10 as rare variant content will drive ‘rich’ GWAS studies. Price tgt is lowered to $40 from $47.

- JP Morgan notes that despite the uncertainty over quarterly results, however, they maintain their long-term favorable view given the size of the genetic analysis market and strong competitive position for ILMN, which will report F2Q results on 7/21 @ 5pm ET. Maintains Overweight rating.

Read-through for other life science companies . . . buy LIFE. JP Morgan does not see direct read-through for other companies in their life science tools universe, other than AFFX, which also has a GWAS business. While we expect a number of companies, incl. LIFE to be impacted by the preannouncement, they would use any pullback as a buying opportunity, in particular for LIFE, which doesn’t have a microarray business and has little near-term exposure to the GWAS slowdown. Recent commentary from management (see transcript of their call with CEO Greg Lucier last month) has also confirmed that the company has not seen a recent slowdown in academic demand.

- Morgan Stanley: 2010+ and Fundamental Story Intact, Maintaining Overweight … They do not believe the Illumina story is broken, with the 2010 stimulus thesis and core business fundamentals largely intact given: 1) a meaningful multi-year stimulus benefit with upside to current consensus expectations (stimulus contribution in 2010 likely conservative); 2) an intact sequencing product cycle with a longer tail than many believe; and 3) the array business is struggling through a demand gap rather than a permanent fundamental negative inflection. However, trends in genome wide association studies remain the primary risk to the stock.

Maintains Overweight, lowering tgt to $38 from $42.

Notablecalls: I think this one has a fair chance of bouncing today. $32-$33 range is my target for this one.

Werner Enterprises (NASDAQ:WERN): Upgraded to Overweight at JP Morgan; potential for upside surprise

JP Morgan is upgrading Werner Enterprises (NASDAQ:WERN) to Overweight from Neutral with a $24 price target (prev. $18).

According to the analyst, WERN is one of the names within their coverage space that reflects low expectations and potential for significant upside surprise. They believe that WERN’s 2Q results are likely to show significant traction on cost-cutting initiatives while it provides attractive leverage to a turn in the economy in the medium term. They also believe the combination of low expectations and traction on cost cutting supports an attractive reward to risk profile even if the TL cycle turn takes time.

Low expectations support attractive risk to reward. Short interest of 24% of the float for WERN versus 11% on average for the other TL and LTL names JP Morgan covers is one indication of market skepticism regarding WERN, while its low 4.2x EV/ EBITDA valuation on 2010 estimates (vs. 8.2x on average for KNX and HTLD) reflects caution. Sell-side skepticism is also apparent with only 1 Buy rating out of 15 total ratings.

Serious approach to cost cutting could provide upside surprise. The firm believes a combination of aggressive non-driver cost reduction and further fuel efficiency gains can provide better than expected margin and EPS performance for WERN in 2Q09, and WERN’s cost-cutting activity should provide support for EPS as a TL turn may take patience.

Early cycle name with leverage to a turn. Historically the TL group including WERN performs well coming out of a downturn with WERN up 21% and 38% on average in the six and twelve months following the last quarter of the two most recent recessions (vs. the S&P 500 returns of 12% and 15%). They also note WERN’s significant EPS sensitivity of $0.13/ share to a 100 bp improvement in its operating margin.

Raising EPS estimates. JP Morgan is raising their 2Q09 EPS estimate from $0.18 per share to $0.22 per share and full-year 09 EPS from $0.72 to $0.78. 2010 EPS also rises. Stronger cost side performance is a key driver of the increases to our EPS forecasts.

Notablecalls: I like this call from the trading perspective. If JP Morgan is right about the potential significant upside surprise in the coming quarters, this one is going to zoom higher. The 24% short interest in the name is going to make sure of that.

Usually, when a tier-1 firm like JP Morgan comes out with a positive piece (estimates getting bumped higher), smaller firms tend to follow. This is how short squeezes develop.

I suspect this call will put some fire under the shorts today pushing the stock markedly higher. I see 5-7% upside in the name (just gut feel).

Electronic Arts (NASDAQ:ERTS): Upgraded to Buy at Merril Lynch/BAM

Merrill Lynch/BAM is upgrading Electronic Arts (NASDAQ:ERTS) to Buy from Neutral following a modest post-E3 sell-off.

According to the analyst the upgrades is based on 1) expected upside to consensus estimates in 1Q and 2Q with company likely tracking at/above their early FY10 internal plan, 2) strength of Sims 3, Active and Need for Speed franchises likely driving improved investor sentiment on EA’s
execution, 3) catalysts and seasonality with the summer period historically giving the best return on EA’s stock and the firm sees several upcoming catalysts. Merrill is $100mn above consensus in F1Q (June) and F2Q and their bias is that Street estimates move higher for FY10/FY11 over next 90 days, as key Active and Sims titles should have catalog and sequel strength.

Multiple catalysts
In addition to 1Q/2Q upside, they see the following catalysts helping drive improved investor sentiment: 1) Strength of key Sims 3 franchise and progress on cost reduction initiatives outlined on 1Q conference call, 2) NPD retail sales data for EA improving with increases in market share reflecting a strong June/Sept Q title slate, 3) Need for Speed release in September, units for this key franchise could be up after several years of declines given easy comps and 4) possible PS3 price cut in August or September helptin drive improved sentiment on HW trends.

Valuation attractive if ests. going up, raising PO to $26
EA valued at 12x ex-cash FY11 (CY10) EPS estimate which is well below its historical average of over 20x. In conjunction with the upgrade to BUY, the firm is raising their PO to $26 from $25, rolling forward basis to FY11 using 17x excash EPS estimate of $1.14, plus $7 in cash (a discount to 20x target for ATVI).

Analyst notes they see upside to their PO at $26 based on 2x P/S if execution improves and EA can sustain 10-15% margins. Reaching 10-15% op. margins could warrant a 2.0x P/S multiple ($34 stock price) as EA traded at 4.5x sales last cycle on peak margins of 27%.

Notablecalls: I like this call as it highlights clear near-term catalysts and notes the $26 price tgt may end up being conservative.

I think ERTS will trade in the $21.50-22.00 range today. I don´t think one will get any fills below the lower end of that range.

Biogen-Idec (NASDAQ:BIIB): Cautious comments and a downgrade following another PML case

Biogen-Idec (NASDAQ:BIIB) is getting some cautious commentary after the co reported another case of PML in Ex-U.S.,confirmed June 23, 2009. This is the 10th confirmed PML case since Tysabri was relaunched in July 2006. This patient had received 30 doses of Tysabri therapy.

- Deutsche Bank is downgrading BIIB shares from Buy to Hold, as they believe the shares are now fairly valued. Firm notes that when they upgraded, they argued that at about $42/ share BIIB shares were pricing in an overly pessimistic Tysabri scenario (i.e. that it would decline dramatically or even be pulled from the market). Tysabri, however, continued to grow. In their opinion, the stock is now pricing in reasonable Tysabri expectations and no longer warrants being one of firm`s "top picks" in 2009.

Longer term (1-2 years), BIIB remains one of Deutche`s favorite names. They still believe the Street has dramatically underestimated the company's EPS leverage (industry high R&D spending should come down ~7% as a % of revenue over the next 5 years). In addition, BIIB has 7 drugs in ph 3, for which the stock reflects little -- if any -- value. Shorter term, they think upside could be driven by wise use of cash. They continue to hope BIIB will use at least some of its cash to buy stock back (similar to 2007's "Dutch Tender") and/or complete a smart acquisition in the neuro or cancer fields.

- Jefferies notes that with emerging PML cases with Tysabri use (particularly in ex-U.S., where incidence is >4x higher vs. U.S.), they view increased adoption of drug holiday as strong possibility. BIIB trades below peers (~15-20% discount); however, they believe significant upside potential to current levels may be limited, except for take-out speculation. Maintains Hold and $53 tgt.

- Morgan Stanley says the new PML case supports thesis of increasing risk.

Impact on firm views: In support of the thesis that PML risk (rare brain infection associated with Tysabri use) is increasing with longer treatment duration, Biogen Idec announced on Friday its 10th case of PML following re-launch of Tysabri (June 2006; 13 including clinical trial set) and importantly, the 6th case in patients treated with drug for longer than 24 months. With this new case, the WW PML risk is ~1/1000 in patients treated for >24 months, and by firm`s estimations at least 1/500 ex-US in this patient population. They continue to believe the risk of PML is evolving and expect the rate to increase past the three year anniversary of Tysabri’s re-launch (although company has indicated plans to stop weekly reporting of cases in July) posing risk to the bull thesis of Tysabri re-acceleration and almost all forward Street estimates.

Maintains Underweight and $44 tgt.

Notablecalls: PML is nothing new but it kind of looks like the shares have found a glass ceiling. Looks like down is the path of least resistance for the time being.

No posititive catalysts around (barring a takeover)

I would not be surprised to see the stock down 1-1.5 pts following these comments.