Cubist Pharma (NASDAQ:CBST): Downgraded to Underperform at Oppenheimer

Oppenheimer is downgrading Cubist Pharma (NASDAQ:CBST) to Underperform from Peer Perform.

Firm notes they are downgrading CBST based on risk of unfavorable in-licensing/acquisition, current valuation, Cubicin litigation risk, and low probability of takeout. Importantly,

1) Firm remains cautious ahead of a significant in-licensing or acquisition;

2) They believe CBST is fairly valued at $17.00-$19.00 after adjusting for an in-licensing or acquisition;

3) They believe Cubicin patent litigation represents a significant revenue overhang;

4) They believe an acquisition is unlikely given the generic Cubicin challenge and ensuing patent litigation.

Oppenheimer continues to believe a meaningful late-stage acquisition/product in-licensing is required to maintain bottom-line growth, increasing risk and potential R&D expense. They see a limited number of opportunities in the antiinfectives space, and believe execution risk increases if CBST shops outside of its core domain.

Cubicin Patent Litigation Significant Revenue Overhang. Cubicin revenues could decline significantly within the next 1-2 years assuming a generic entrant. Based on our understanding of the Cubicin patents, TEVA may request summary judgment, representing significant downside.

Acquisition Unlikely Given Generic Challenge. Oppenheimer believes an acquisition is unlikely given the risk of generic Cubicin within the next 1-2 years. Also, recent stock appreciation based on a potential acquisition is unwarranted.

Notablecalls: CBST traded up 10% yesterday on takeover speculation. We saw comments out of RBC Capital around noon saying they spoke to management and there was nothing that would indicate a deal was in process. The stock ticked lower on this but the shorts got squeezed into the close.

Must say I have seen this movie before. It usually ends up with CBST giving back almost all of its gains over the next couple of days as speculation cools down. Now it looks like Oppenheimer is here to speed up the process. Note that none of the stuff they are saying is new but it will cause pain for the longs today.

$20.50 downside target in the the s-t looks prudent here, making anything above $21 a short.

Celgene (NASDAQ:CELG): Actionable Short Call Alert - Cowen

My favourite call today comes from Cowen. They are downgrading Celgene (NASDAQ:CELG) to Underperform from Neutral based on based upon concerns over 1) valuation, 2) the company’s ability to meet consensus revenue and earnings expectations and, 3) the potential for patent challenges to create an overhang on the stock. They expect CELG to underperform the market by 20%+ over the next 12 month

Can Revlimid Be A $5B+ Drug? Celgene’s small molecule franchises have finite patent lives and its pipeline appears immature. Cowen's NPV analysis of the company’s oncology franchises suggests CELG shares are worth $45 assuming Revlimid sales reach $5B+ and the drug’s 2026 U.S. polymorph patent holds up to scrutiny. Sensitivity analyses indicate CELG might beworth between $22/share and $61/share depending on one’s assumptions for Revlimid’s peak sales potential ($2-8B) and patent life (2016-2026).

How Much Will MM-015 Really Matter? Shares are up 25%+ in the wake of positive data from MM-015 as the bulls anticipate a meaningful acceleration in Revlimid sales driven by 1) greater front-line penetration and 2) increased adoption in maintenance. Although the firm expects the average duration of Revlimid therapy to steadily increase, they believe there is risk that the MM-015 results may not support the superiority of Revlimid relative to induction therapy with Velcade, or conclusively establish the clinical benefits of Revlimid dosing in maintenance. They expect Revlimid sales will continue to struggle to meet consensus expectations.

Intellectual Property Risk Ahead. Cowen expects the next 12-18 months to feature more discussion around the potential for generic threats to Celgene’s major franchises, including a challenge to Thalomid’s patents (ongoing), the U.S. expiry of Vidaza’s exclusivity (2011), and likely ANDA filings on Revlimid (late 2009/early 2010).

In Cowen's experience, oncology drugs rapidly penetrate new markets, followed by a plateau in sales growth. Examples of this phenomenon include Tarceva, Erbitux, Nexavar, Herceptin, and Thalomid. Less often, as exemplified by Rituxan or Avastin, oncology therapeutics grow for many years driven by new data indications. Investor expectations place Relvimid firmly in this latter camp. Street consensus calls for sales to grow from $1.65B in 2009 to $3.8B in 2013. This growth is expected to come from substantially higher sales in myeloma (greater ex-U.S. market penetration, more front-line use, and longer duration of therapy) coupled with modest use in NHL and CLL. Analysts have constructed fairly complex models of the myeloma marketplace, many of which have Revlimid reaching $5-6B in peak sales. Yet despite these great expectations, Revlimid is struggling to achieve consensus sales figures during a time period when growth should be rapid. The chart above depicts changes to consensus 2010 revenue expectations for Celgene over the past 18 months

Notablecalls: Eric Schmidt, Ph.D. and his biotech team at Cowen have done a terrific job with this call. If you happen to be long CELG I suggest you get your hands on a full copy and study it hard.

The stock is up almost 20 points from its lows & is looking toppish. And then Cowen comes and slams it hard. This one will take a dive. I'm calling it Actionable Short Call here.

I see it down 2pts+ today alone.

Note that most analyst are positive on the name: 19 Buys, 5 Holds and just one Sell.

Freeport-McMoRan (NYSE:FCX): Upgraded to Buy at Merrill Lynch/BAM

Merrill Lynch/BAM is out with a major call upgrading Freeport-McMoRan (NYSE:FCX) to Buy from Underperform and raising their target price to $87 (prev. $49).

According to the firm the upgrade is based on a material upgrade to their copper price forecasts. Freeport is the largest pure-play copper miner and provides high leverage to firm's more positive copper view. Sensitivity to copper prices: a $0.10/lb change in copper is roughly $0.50 in EPS for FCX. They are raising their 2010 EPS to $9.25/sh (was $2.85). At this level of EPS, FCX should be able to generate over $10bb EBITDA and $10/sh of FCF. Dividend reinstatement also a high probability event for 2010.

Move copper outlook to high-end of Street
Firm is incorporating new base metal forecasts into our models. Their new copper price deck is as follows: 2009-$2.15/lb (was $1.76), 2010-$3.18/lb (was $2.00), 2011-$3.03/lb (was $1.90). Gold outlook remains unchanged at $1050/oz for 2010. New copper forecast is well above consensus in the $2.00/lb range and above the forward copper price of $2.70/lb. The drivers of more positive view on copper are:

1) a tight concentrate market;

2) lack of new supply in the pipeline;

3) an end to de-stocking; and

4) improving demand in OECD/China.

Merrill Lynch sees copper as structurally one of the best positioned base metals over the long term. Firm notes their prior Underperform was predicated upon an end to Chinese stockpiling leading to higher LME inventories and a downward correction in commodity prices. However, despite a 70% YTD rise in Chinese copper imports, underlying demand appears to be recovering and should be sustainable into 2010.

Increase PO to $87 on higher 2010 outlook
They are increasing their price target to $87 (was $49), given the magnitude of our 2010 EPS revision. Firm's target multiples for P/E, EV/EBITDA, and P/B are generally consistent with their prior PO and in line with midcycle multiples. Based on the current FCX price, they see roughly 35% upside to revised target.

Notablecalls: I view this as a more technical call than anything else. The chart looks like it wants new highs and Merrill/BAM provides the mo-mo crowd the reason to push for a breakout.

I see them gunning for $67+

Oshkosh (NYSE:OSK): Downgraded to Hold at Keybanc

Keybanc is downgrading Oshkosh (NYSE:OSK) to Hold from Buy as it has now exceeded firm's former $30 price target.

In Keybanc's view, the earnings prospects for FY10 from its recent MRAP – ATV contract win (the crux of their upgrade on July 6) appears to be discounted in the current share price. While they expect there could be modestadditional upside in the shares, and remain encouraged by OSK's additional MRAP prospects including a follow-on order for potentially 1,300 vehicles (bringing the total program quantity to 5,244 vehicles) in addition to numerous parts and service contracts that could amount to hundreds of millions of revenue potential, they believe the majority of the "easy money" has been captured. Since their upgrade on July 6, OSK shares have appreciated 61.7% vs. the S&P 500's increase of 11.6%. This outperformance was driven by the positive earnings step function in FY10 (firm is modeling $3.25 vs. consensus of $2.48 from their estimate of a loss per share of $0.54 in FY09) and the potential to not only bridge the earnings gap to when fundamentals begin to improve in its challenged Access Equipment & Commercial segments, but to also improve its liquidity position.

While they still expect these drivers to materialize, Keybanc believes three primary factors could limit the near-term upside in the shares:

- First, the continuation of future positive news flow is likely to abate. They believe OSK will be awarded the additional 1,300 vehicles and consensus estimates for FY10 ($2.61) will increase; however, the incremental news of unexpected awards (FMTV, Australian Land 121) is uncertain.

- Second, current valuation fairly reflects OSK's future prospects and normalized earnings.

- Third, in their view, the likelihood of an equity offering is becoming a higher probability given the run up in the shares coupled with the lack of a defense performance payment announcement thus far. While an equity offering would pose a near-term risk to the existing share price, depending on pricing level, the firm anticipates being supportive of a deal as a result of the prospect of an improved capital structure.

As a result of the aforementioned factors, they are downgrading their rating on the shares of OSK to HOLD from BUY.

Notablecalls: I think this downgrade will work as Keybanc has done a good job covering the stock lately. Some of their clients are sitting on hefty gains and will be looking to sell in the n-t. So you either short now or fade the upcoming news of the 1,300 M-ATV order.

I'm guessing 4-5% downside in OSK today.

Human Genome Sciences (NASDAQ:HGSI): Upgraded to Buy at ThinkEquity; target raised to $26 (new Street high)

ThinkEquity is upgrading Human Genome Sciences (NASDAQ:HGSI) to Buy from Accumulate and raising their rating to $26 (prev. $18).

Firm notes they spent the past few days evaluating their model for Benlysta and conclude that their estimates are just too conservative. They believe BLISS-76 will, more likely than not, confirm the results seen in BLISS-52. Based on a revised model, they raise their price target to $26 per share, which justifies a raise of rating to Buy.

ThinkEquity revised their model after speaking with several people in the industry and the company, which has done extensive primary research. This analysis points to the fact that in the U.S., there are approximately 325,000 patients treated for some form of Lupus. They believe that at least two-thirds of that group are candidates for treatment with a biologic therapy, or approximately 200,000 patients with mild to severe Lupus (SLE). They pick what they believe is a modest price point of $25,000, between what patients are paying for TNF biologics on the low end and MS therapies on the high end. Firm also assumes market penetration over time of 35% share. Next, they assume the EU market is slightly larger than the U.S. market and apply the same assumptions

The result of these changes triangulating an EPS, sum-of-the-parts, and FCFF model points to $26 per share. At first blush, the firm notes they are surprised by the numbers, but what one must recognize is that Lupus is an unmet medical need and Benlysta is essentially a benign drug that has shown itself to be active, and therefore helps patients. Given the marketing power of Glaxo, they believe that patient awareness will grow rapidly and that physicians will prescribe it. Primary research conducted by the company points to a medical community that is very aware of and willing to use Benlysta. These assumptions point to Benlysta's potential to be a $2.7 billion dollar drug and may eventually prove to be conservative.

Next Event: BLISS-76. Given the similarities in trial design between BLISS-52 and BLISS-76 and the statistical significance of the recent BLISS-52 data, a 57.6% response rate at high dose versus control at 43.6%, they believe it's reasonable to assume that a positive outcome is likely.

Notablecalls: Note that the $26 target is the new Street high (by a mile). The logic behind the price target looks solid at first blush and I think will bring in the next wave of buyers.

I suspect the stock will trade over $15 level today and may even reach $15.50.

SAVVIS (NASDAQ:SVVS): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is out with a very nice call on SAVVIS (NASDAQ:SVVS) upgrading the shares to Overweight from Equal-Weight and establishing a $21 price target.

As one of the few pure plays in both the managed hosting and colocation space, SAVVIS should see a revenue inflection point this year due to:

1) a favorable supply / demand imbalance for data center space;

2) robust adoption rates in the near term for proximity hosting; and

3) the encouraging long-term growth outlook for data center industry demand due to factors such as cloud computing.

Morgan Stanley believes that SAVVIS represents a turnaround story from last year as management has raised guidance for each of the last two quarters, and they believe the company should generate strong free cash flow for 2009. In firm's view, the stock trades at a relatively inexpensive 2011e EBITDA multiple of 5.1x given the encouraging growth prospects in the data center space.

What's new: Morgan Stanley rates SAVVIS Overweight as there is 43% upside implied by their price target. Their 2009 EBITDA estimate of $209.2M is at the high end of management’s newly raised guidance and $7.4M above consensus; 2009 FCF estimate of $43.7M is near the high end of guidance. Firm notes that the stock has a 16% recurring free cash flow yield, higher than Equinix and the tower stocks (AMT, CCI, and SBAC). SAVVIS cited an improving environment overall and a 4Q09 recovery for revenues and EBITDA, consistent with their expectations. Despite expected revenue pressure, 2Q EBITDA (ex a one time early termination fee) of $48.6M was ahead of Morgan's $46.1M estimate and consensus of $43.9. Cash gross margins came in at 45.4%, better than firm's 43% estimate. The recently announced 105k square foot data center expansion in Weehawken, NJ (35k sq ft expected for completion by 2Q10) should position the company for growth in proximity hosting.

Notablecalls: Morgan Stanley's Simon Flannery has done a pretty good job with this call - for obvious reasons I can reproduce only a miniscule part of it on the page. If you can get your hands on the full copy, I suggest you read it.

This call has many of the traits I usually look for in a favourable situation/call:

- Valuation (SVVS is trading well below those of say EQIX)

- The chart (new highs are coming)

- Upgrade from a tier-1 firm (MSCO in this case). And it really looks like they have put some work into it.

The only missing part in my book is a n-t catalyst (although the analyst is hinting SVVS may raise guidance next time they report).

All in all, I think this is a terrific call and will push the stock up by 6-8% today. The futures are looking down at the moment, that's my only worry apart from getting decent fills.

Huron Consulting (NASDAQ:HURN): Colour on news

Huron Consulting (NASDAQ:HURN) is getting lots of commentary following news out late Friday as the co disclosed need to restate financials for 2006-2008 and 1Q09 due to accounting errors, withdrew 2009 EPS guidance and lowered revs guidance by 12%, deals with an SEC investigation and announced the departure of CEO/CFO:

- Baird is downgrading HURN to Underperform with a $15 tgt (prev. $50) on lack of confidence in their estimates as their previous concerns about retention of MDs has increased significantly given the restatement of earnings, potential reputational damage, the SEC inquiry, senior management turnover, disappointing 2Q09 results and lower 2009 top-line guidance indicative of no bonuses being paid in 2009.

Firm's $15 price target represents 5.0x FTM estimated EV/EBITDA including stock comp expense or half the average of the previous six quarters given the significantly negative implications of Friday's announcement. While they believe there is significant franchise value that should be applied to HURN's current personnel, they have no confidence on the level of people that will be retained. Until the firm can gain confidence that attrition will be better than feared and that the reputational damage will be minimal, they can only recommend that investors avoid the stock.

- William Blair downgrades HURN to Market Perform noting Management’s lack of communication with the Street surrounding this news makes it impossible for use to fully understand what has happened with the accounting or with recent business trends. In addition, these announcements and the stock price decline introduce a number of issues that they do not expect to get answers about for a while. Specifically, the news about a significant restatement and SEC investigation could damage the company’s brand (especially given the accounting background of its consultants), could lead to increased consultant turnover (especially given the large amount of stock used as compensation for Huron's consultants), and will result in a number of shareholder lawsuits. As a professional services company with a relatively high amount of debt, it is not implausible to argue that this event causes the company to languish for an extended period of time or eventually unravel. Given that the risks and uncertainty are very high right now and the firm does not expect to get a lot of clarity regarding the company’s risks for a while, they cannot recommend purchase even at the company's reduced price in the after-market and their rating is now Market Perform.

The range of potential explanations ranges everywhere from a.) outright fraud to b.) the former shareholders of these business shared/redistributed some of the proceeds from the earnouts with their colleagues as a reward for helping them achieve the earnout and did not realize this constituted compensation. The departure of the company's CEO, CFO, and CAO could argue that there is some element of the first explanation going on here. However, the fact that the former CEO of Wellspring David Shade is remaining as Huron's chief operating officer, comments in the press release that the redistribution of these payments were based in part on continued employment with Huron and/or personal performance, and the comments in the press release that the company may have to sustain higher cash compensation going forward could argue for the less sinister (although still concerning) explanation. Without further explanation from management is it impossible to know what happened at the company though.

- Oppenheimer is reducing their rating to Underperform and is reducing their 2009 revenue (before reimbursables)/EPS estimates to $650M/$2.00, respectively. Firm's 2010 revenue (before reimbursables)/EPS estimates update to $680M/$2.70, respectively. They anticipate 2009 EPS to be adversely impacted by restatements and a reputational headwind. Firm estimates a moderate recovery in 2010 on gradual macro improvement coupled with aggressive cost reductions.

- Deutsche Bank is downgrading the stock to Hold with a $20 target noting the key concern they have now is consultant and client retention. For the consultants, Huron becomes the key place to recruit from, which will likely create the need for significant retention bonuses even if Huron’s performance is weak for the next couple years. For consultants who joined recently from Stockamp (a $219m acquisition in July 2008), their ties to Huron are even less secure. Retaining high-performing consultants is never easy, for Huron is will be very difficult. The best result for Huron maybe to sell off the various divisions to competitors, but the key question is why anyone would pay for these operating units when you can just recruit the key individuals

- UBS notes the restatement moves $57mm of earnouts to compensation cutting EPS by $2.98 since 06 ($0.19 in Q109, $1.60 in 08, $0.97 in 07, and $0.22 in 06). They expect Huron to release a Q&A on their website this morning.

Firm is assuming the restatement was the result of careless accounting interpretation over 3 years, rather than something sinister, and the parties to blame have left. Most revenue is generated by about 200 MDs who appear blameless, so they think clients may be forgiving. Firm is cutting their 2010 revenue estimate to their prior 09E level and EPS estimates to $1.64 for 09, $2.16 for 10, and $2.63 for 2011.

Notablecalls: What a mess! But is it really fraud? I think not. Given the fact HURN is staffed with accounting specialists, the accounting mishap does look like an unlikely explanation but as the old adage goes - the shoemaker's kids go barefoot.

If this is the case then we may have an eventual bounce candidate on our hands. Yet, there are problems to overcome in the n-t:

- Competitors will be on the attack looking to lure top rainmakers away from HURN. With no bonuses in 2009, some of these people are bound to jump ship. This would translate into lower revenue in the coming periods.

- The management will have to tackle a) the SEC b) angry shareholders and bloodthirsty class-action lawyers. With most of the top dogs gone how will the new people handle situation? They have to spend their time working legal, PR & operational stuff. That's a handful!

- HURN is going to be a tainted stock for quite a while. Big game hunters are likely to steer away from the situation for now.

- HURN has basically no assets apart from the people that work there. Plus, the company had approximately $312 million of net debt at the end of the first quarter. If it falls apart, it really falls apart.

So what to do with the stock?

I suggest most of you stay away from the situation. For those willing to take super-sized risk...$14-$16 is the range you should be looking at for a possible bounce. But don't overstay your welcome. This one could just as easily be a $12 stock.

Compass Minerals (NYSE:CMP): Upgraded to Overweight at JP Morgan

Compass Minerals (NYSE:CMP) is upgraded to Overweight from Neutral at JP Morgan with price target raised to $66 (prev. $50).

JP Morgan notes they raised their 2010 EPS forecast for Compass from $5.05 to $5.50 to reflect 8% higher salt prices given that Compass has now completed 80% of its salt tenders for the winter season. 2010 EPS model should prove conservative because it assumes (5%) lower salt volume despite Compass expanding its capacity about 7% to displace high-priced imported salt tonnage. Firm's earnings model in effect reflects a warm winter. They also assume 2010 Sulfate of Potash (SOP) prices of $500 per ton, about a $65 premium to a conservative MOP price, which could understate 2010 EPS power by $0.50. (SOP tends to sell at a $100-$150 premium to MOP. Each $100 per ton price change in SOP prices is worth about $0.75 per share in EPS.) Compass currently trades at 9.2x year-ahead EPS and 5.9x EBITDA. The company’s average free cash flow yield in the 2009-2010 period should be about 8%. JP Morgan's 2010 price target is $66 or a 12x multiple of EPS representing 30% appreciation potential over the coming year.

The investor faces a natural reluctance when contemplating the purchase of Compass Minerals shares because Compass has two businesses with perennial uncertainties. Winters may be warm or snowy, which materially affects volumes and profits of its core salt business. Secondly, the price of potash is and has been volatile, which weighs on the profits of its Specialty Potash segment. Yet there are moments of valuation when these uncertainties matter less.

The Specialty Potash segment is sufficiently depressed from a volume standpoint and its earnings are unrepresentatively low such that we believe an investor is partly shielded from negative volatility in salt volumes from a valuation standpoint. Should the winter season be normal and potash premiums truer to history, the company is capable of earning in excess of firm's current estimates (above $6.00 versus JPM $5.50 estimate). They think that the company would earn in the vicinity of $4.00 per share should potash prices or volumes prove exceptionally poor and the company faces an unseasonably warm winter. Firm thinks that a 12x multiple of depressed EPS is where the valuation would settle out.

Compass Minerals has been a poor performer in 2010. Investors are in search of cyclicality and have become warier of agriculture. Compass shares have underperformed the market by about 23% year to date and underperformed such bellwethers as Potash Corp and Mosaic by 46% and 43%, respectively. JP Morgan thinks this level of underperformance provides a reasonable entry point into these good-quality shares.

Notablecalls: The call makes sense and coming from JP Morgan, I think will move the stock. The eternal question of course remains - how much? One thing to me is quite clear - one should not pay up too much pre market. I think (depending on GDP data to be released soon), one can get decent fills around the open.

JPM makes a good case for CMP and the buyers will line up accordingly.

First Solar (NASDAQ:FSLR): Downgraded at Credit Suisse

First Solar (NASDAQ:FSLR) is getting downgraded to Neutral from Outperform at Credit Suisse this morning following earnings out last night. The firm is lowering their target to $135 (prev. $200).

Earnings momentum peaking. While there has been a widespread concern on FSLR’s margins, FSLR’s stock in the meantime has benefited from its consistent track record of beat and raise quarters in the past. While CSFB expected upside to the quarter, FSLR's reported Q2 results were well above consensus. However, they think Q3 will be the last good quarter for a while for similar upside surprises; and they expect a period where estimate resets are asymmetrically skewed to the downside as we move into 2010. Firm expects the stock to look ahead of this peaking earnings momentum and pull back to lower levels.

Reasons for downgrade (short summary):

1) earnings momentum peaking. CSFB thinks Q3 will be the last good qtr for a while for similar upside surprises; and they expect a period where est resets are asymmetrically skewed to the downside as we move into 2010.

2) rebates could accelerate price competition and will sharpen focus for customers and investors around pricing. We also expect Asian c-Si suppliers to match or beat these rebates in return.

3) ASP declines are winning the battle over vol growth;

4) rate of cost reductions could moderate. Our call is a reflection of the new risk/reward on the stock; still believe FSLR has a compelling technology and capable mgmt team that can deliver on longer-term roadmaps.

Notablecalls: This is a powerful downgrade from CSFB Solar Energy team. I'm actually surprised they didn't downgrade the stock to Underperform (the language is that strong). The stock will have 8-10% downside in store today.

General Electric (NYSE:GE): Upgraded to Buy at Goldman Sachs

Goldman Sachs is upgrading General Electric (NYSE:GE) to Buy from Neutral with a $15 price target (prev. $13) as as comments reported after the close by US House Financial Services Chairman Barney Frank suggest broadening support for regulatory reform that would not mandate the separation of GE Capital. While numerous uncertainties remain, Goldman is reducing their probability assumption for a costly GECS separation to 25% from 50% and this drives their higher target. Greater potential for a manageable regulatory outcome should prompt investors to focus on longer-term benefits of economic and credit stabilization to GE shares.

Catalyst
After the close, Bloomberg reported that Barney Frank indicated that GE and “manufacturers with finance businesses should be allowed to keep the units under a revision to rules that govern banking.” This seems to strengthen the view that legislative support for reform requiring GECS separation as implied by the Treasury “White Paper” is declining. Goldman estimates separation could cost equity holders $40 bn (lower EPS on higher taxes, capital and other costs) and had assumed a 50% probability (now lowered to 25%) in their old $13 price target. While uncertainties remain and GE faces other challenges (e.g. later cycle industrial mix and rising credit losses), they believe that – along with economic and credit stabilization signs - risk/ reward is improved to justify upgrading their rating.

Valuation
The $15 12-month target assumes 1) $12 for Industrial on $0.85 mid-cycle EPS, 16x PE (vs. 14.5x prior on 25% lower probability of GECS separation), discounted 1.5 yrs at 10%, 2) $3 for GECS on $0.40 mid-cycle EPS, 10x PE, discounted back 2 years at 15%.

Notablecalls: What can I say. The stock will trade up on this by about 4-6% but the $15 tgt is really uninspiring. It's more about getting a blessing from GSCO than anything else.

MGM Mirage (NYSE:MGM): Downgraded to Neutral at Merrill Lynch

Merrill Lynch is out downgrading MGM Mirage (NYSE:MGM) to Neutral from Buy while lowering their target to $8 (prev. $11).

MGM has taken an increasingly aggressive strategy toward booking group business in late 2009, ’10 and ’11. While this helps to fill MGM’s huge 33.7K room inventory, it effectively locks in lower rates, meaning MGM’s earnings snap-back could be delayed. No signs of group volume recovery by the hotel companies, means pricing will remain challenged for at least the rest of ’09 and likely longer.

Supply picture may not be improving as quickly as thought
Merrill continues to believe supply risks from CityCenter cannibalization (6K rooms, +6% growth) are understood, but the Fontainebleau LV (4K rooms, +4% growth) bankruptcy in June and slow progress on Cosmopolitan (3 rooms, +3% growth) were incremental positives. Now, there are signs that Fontainebleau LV could be worked out and Cosmopolitan (appt’d a new CEO) could open late ‘10, meaning supply of an add’l 7K high end rooms (+7% growth) will continue into late ‘10/’11.

Credit separation from equity a bad signal
In the last run, MGM’s debt and equity moved in lock step, as reduced likelihood of bankruptcy was positive for both. This hasn’t been the case recently w/equity rallying 36% (vs. S&P 11%) but LT debt (Jan 17 7 5/8) narrowing slightly from 64.5 to 66.25. With $12B in debt and a quick profit snap-back in ’10/’11 less likely due to locked-in rates + supply, add’l dilution for equity holders is a continued risk.

Notablecalls: The call has some new info (negative) and will likely work. You can get some decent fills in the pre market and cover lower later in the day.

MGM does not have any Macau assets to monetize so it's pretty much dying a slow death.

Right now I'm interested if it can go sub-$7 or not. With a little help from the market I think it can.

Quidel (NASDAQ:QDEL): Downgraded at Stephens

One call that I like this morning (in light of pre market weakness) is Stephens' downgrade of Quidel (NASDAQ:QDEL) to Equal Weight from Overweight. Price target remains at $16.

Firm notes the downgrade is based on valuation. The stock has had a very nice run in light of a significant improvement in near-term fundamentals associated with swine flu. They believe the current valuation of 29x 2010 EPS estimate fully represents the current fundamental outlook. Additionally, they worry that a speculative bubble might be building surrounding investors buying this name solely based on near-term upside to estimates associated with swine flu. While they believe QDEL is likely sitting in front of a sustained period of stronger-than-average flu activity, they believe investors would be shroud to focus on long-term sustainable earnings power.

Firm's belief is that their 2010 EPS estimate of $0.54 estimate is a better indication of long-term earnings power. Finally, based on channel checks at AACC, Stephens would highlight that they have some concerns surrounding increased commoditization and pricing pressure in some of QDEL's core markets. They recommend investors move to the sidelines and look for a better entry point with this name.

Notablecalls: Note that Stephens is the main firm covering QDEL. They have done well with the stock and are now telling people to get out. The stock will get hit..it will bounce...and will get hit again. That's what I think will happen today.

This one can do 5-7% to the downside.

Woodward Governor (NASDAQ:WGOV): Downgraded to Neutral at Baird; Goverment suspends MPC

Baird is out quite negative on Woodward Governor (NASDAQ:WGOV) downgrading the shares to Neutral from Outperform, no change to $23 price target. Firm believes suspension of MPC from participating in federal grants/programs creates a material revenue risk for WGOV and exacerbates already uncertain revenue visibility in company's aerospace, power generation, and infrastructure-related end markets. They remain constructive on long-term growth potential, but would look to high-teens to become buyers.

- MPC suspended from federal programs. As disclosed in WGOV's third quarter 10-Q, MPC (included in WGOV's Airframe Systems segment) received a notice of suspension from the U.S. Department of Defense stating that MPC has been temporarily suspended from participating in new federal procurements and grants, effective July 8.

- Recall that MPC derives approximately one-half of its near-$200MM revenue base from defense markets.

- Suspension applies only to MPC and not other WGOV businesses. MPC Products may continue to perform existing work under prime contracts in existence as of the date of the suspension.

- Sub-contractor work also limited. Certain government contractors must provide written notice before awarding MPC subcontracts exceeding $30K in value.

- DOJ investigation remains open. As previously disclosed, MPC is subject to a Department of Justice investigation regarding pricing practices prior to June 2005. The company is in the process of finalizing a settlement for this matter with $25MM accrued for settlement.

- WGOV does not believe MPC's suspension is related to any concerns of misconduct other than the aforementioned pricing practices issue.

Notablecalls: It looks like the 10-Q came out late last Friday and noone really paid any attention to the MPC suspension notice. Now Baird is out with a downgrade citing the suspension as the main cause. I think WGOV will get it (it's a mover stock). Only problem is how to get decent fills.

Harley-Davidson (NYSE:HOG): Positive comments following Analyst meeting

Somewhat surprisingly we have several firms out positive on Harley-Davidson (NYSE:HOG) following Analyst meeting:

- Baird is raising their target to $28 (prev. $21) and reiterating Outperform rating after the firm talked with management/dealers in meetings in Denver. They believe the turnaround story is building momentum led by a credible CEO with impressive credentials. Beyond the standard Harley noise – they advise investors to focus on the strength of the brand, opportunities to lower structural cost, and ideas to finance HDFS in better ways. Details were limited, but Baird believes the turnaround story will attract investment.

Summary. The presentation lacked tangible goals or meaningful metrics, leaving investors to overweight intangible clues – which were bullish. Firm notes they like that management is addressing structural cost, cutting dealer inventory, boosting residual values, refining the dealer network, exploring options for HDFS, and offering investors a more credible outlook. As the turnaround unfolds, they expect investors to demand more tangible metrics – but initial impression is favorable.

Brand. Dealers tell the firm more bikes are selling below MSRP, which diminishes the value of the brand. Management acknowledged this problem and vowed to protect the brand at all costs, starting with plans to slash production announced in earlier this month. Baird expects days inventory to drop to 75-90 days from 90-110 days, potentially creating short waiting lists again. Naturally, residual values should improve – which has favorable implications for HDFS.

Cost. The Harley-Davidson brand is among the best on the planet, but its operations fall short of world-class. CEO Keith Wandell brings impressive operational credentials to Harley, understands its shortcomings, and has the mandate to make the tough decisions. They expect the York negotiations to set the tone.

HDFS. Management considers HDFS a strategic asset, but acknowledges the need to lower its cost of capital. We'd like to see HDFS partner with third-party underwriters to drive fee income without capital risk (CarMax model). The topic of HDFS remains an insurmountable hurdle for some investors that otherwise might buy the stock – but believe the issue is diminishing.

- Deutsche Bank is raising their target to $26 (prev. $21) noting that although management did not convey any optimism regarding the near term outlook for motorcycle demand, they came away more confident in HOG's ability to maintain recent market share gains and return the business to historic margin levels. Firm maintains their Buy recommendation based on valuation and HOG's additional cost savings potential.

Management conveyed a number of data points which suggest that the company's recent market share gains could be more durable than we perceived (HOG appears to have made significant progress in improving its brand's positioning with young adults). The firm was also pleased to hear management reiterate their commitment to supporting prices and residuals, by aggressively curtailing production. Maintains Buy rating.

Notablecalls: It's quite odd to see so many positive things being said about HOG. Yet, the short interest still stands close to 20% in the name. The chart looks like it wants new highs in the $24 range. Won't get there today but I suspect there is upside in the name today. Say..3-5% or a full 1 pt if you will.

Aetna (NYSE:AET) : Colour on quarter - Bounce?

I wanted to highlight you some comments on Aetna (NYSE:AET) following a surprisingly weak earnings report out this morning:

AET reported operating EPS of $0.68, 13% below the Street's $0.78 est. AET also lowered 2009 EPS guidance to $2.75-2.90 from $3.55- $3.70, a 22% reduction at mid-point.

- Deutsche Bank notes the EPS guidance reduction was primarily due to continued higher medical costs in Commercial segment. The Commercial MLR came in at 85.9% vs Deutsche's 83.4% est, and included $65 million of negative PPRD primarily related to 2008 medical claims; ex PPRD the Commercial MLR would have been 84.6%. For 2009, AET now expects a Commercial MLR of 84.0-84.5% up from prior 82.3-82.8% guidance. This implies a Commercial MLR of 83.5-84.5% for 2H09. Total revs came in at $8.657b, $82m above est. Total membership was 55k lives above 19.052m est, driven primarily by higher Commerical risk and Medicaid ASO, partially offset by lower Commerical ASO.

On a positive note, AET increased health care claims reserves sequentially by $83.1m; however, DCPs declined by 0.4 days from 41.6 to 41.2, likely reflecting the higher reported medical expenses in 2Q09. AET repurchased 10.9m shares for $271m in 2Q. AET reported net capital gains in the investment portfolio in 2Q09.

Separately, the WSJ has an article out today noting that AET has been shopping its PBM, which could provide some near-term support to the stock. While the bear case will highlight that AET's MLR pressures create continued EPS risk, the bull case will state that AET has now moved its guidance to a more conservative level and the firm sees a near-term catalyst forthe stock with the potential sale of the PBM. Maintain Buy rating.

- Citigroup is out saying they think current results could mark a bottom. Aetna's strong customer growth and positive channel checks leave them convinced they can stabilize margin with price increases and still gain share of the shrinking commercial market. Also, large reserve increases last year by competitors leave them with a cushion to absorb higher medical trend this year.

Where the stock closes today (they think $24-$25) will depend on how convincing management is in their earnings call at 8:30a.m. ET that the new EPS guidance can be met. Citi's read is the new guidance is conservative based on sequential 3% reserve growth vs. 0.5% premium growth. Also, the WSJ reported potential PBM sale this a.m., and they expect strong results from WLP Wednesday, provide support.

Notablecalls: I think AET has the ability to bounce. Where? I suspect the stock is a buy sub-$24 and sell around $25. Let's see how that goes.

I personally missed the low $23 buy point.

SonicWALL (NASDAQ:SNWL): Colour on quarter; Upgraded to Outperform at Baird

SonicWALL (NASDAQ:SNWL) is getting commentary this morning after posting stronger-than-expected Q2 results last night:

- Baird is upgrading SNWL to Outperform from Neutral and raising their price target to $10 (prev. $5). According to the analyst the upgrade comes on improving fundamentals and macro environment. SNWL's Q2 showed QoQ product revenue growth and significant improvement in operating margins. This is the inflection point the firm needed to see before theygot more positive about this story. Firm recommends purchase as valuation appears very inexpensive relative to its peers and set a new price target at $10.

Q2 results showed very good operating margins on $49 million of revenue and EPS of $0.10 (Street at $48 million / $0.07). Product revenue grew QoQ at its core UTM and its CDP segments. Geographically, EMEA showed the best growth sequentially (up 20%), while North America was flat as was APAC. Also, subscription deferred revenue grew 4% QoQ to $96 million, a record result.

Q3 guidance is based on a cautionary environment that management expects will continue: revenue of $46 - $49 million and operating EPS of $0.08 -- $0.09 versus consensus of $48 million and $0.08. While Q2 results were encouraging, SNWL is very guarded about the macro headwinds for Q3.

- JP Morgan gives SonicWALL credit for their ability to improve operating margins to 15.7% and good collections in the quarter. Similar to Amdocs earnings yesterday, the underlying tone on the macro environment however has not changed and remains tough. They believe a displacement promotion enacted in Q2 helped push the company over to exceed revenue and cash flow expectations, which they do not believe is sustainable.

SNWL is running a displacement promotion where if a customer displaces a competitive product and buys for the full cost a 3 year subscription service, the hardware is free and included in that price. JPM believes this promotion will continue for maybe another quarter, but do not see this as sustainable. Because cash is collected up front, this promotion they believe is what helped CFO reach $11.1M.

39K units shipped was a good sign. They do recognize that despite a tough market and promotions, they think SNWL has done a good job of capturing what they can in the SMB market evident by 39K units shipped as compared to our 36.2 unit estimate. Company also cited a government deal for 23 E Class UTM appliances which is their higher end product.

Raising Price Target to $7.50: new $7.50 price target, up from $6.00. Maintains Neutral.

Notablecalls: SNWL is mostly a subscription service play, which is something the market should appreciate in these volatile times. I think this Baird upgrade will invite some buyers.

The stock can do 10%+ in the n-t.

Affymetrix (NASDAQ:AFFX): Colour on quarter; Upgraded to Overweight at Piper Jaffray

Affymetrix (NASDAQ:AFFX) is getting lots of commentary followin better-than-expected Q2 results:

- Piper Jaffray is upgrading their rating to Overweight from Neutral and raising their target to $11 (prev. $5)

Firm notes the upgrade reflects a favorable valuation, improving operational metrics and favorable revenue mix. They note the management is successfully restructuring the company's manufacturing cost base (and now turning their attention to operating expenses), the valuation (currently trading at 1.0x 2010 EV/Rev estimate) and the changing mix of business away from markets where they are less competitive (i.e. GWAS) and shifting resources toward markets that benefit Affy's products (such as pharmacogenomics). At this point, Piper believes it is far too premature to suggest Pharma budgets will suddenly strengthen or Illumina's advantage in DNA will evaporate. Rather, they see a company who is in the early stages of turning around, with an attractive valuation (despite the significant move already this year) and ample room to the upside.

Guidance: For 3Q09, Affymetrix anticipates $78M-$81M in revenue, encompassing PJ's ($80.6M) and Street consensus ($78.9M) prior estimates. They see potential upside to 3Q09 expense guidance of ($52-$53M, 55-56% GM).

- Morgan Stanley notes another quarter of stabilizing revenue trends with upside to consensus combined with solid 3Q guidance is encouraging and consistent with their recent upgrade thesis. Moreover, margin upside at both the GM and operating expense levels was also ahead of firm's expectations, and they continue to expect further news on cost cutting later in 2009, which could be a near term positive. Longer term, the success of the new product cycle and the peg array (GeneTitan) migration are the sustainable value drivers for this stock, and they remain cautious given limited visibility (particularly in genotyping) and <5% of the installed base transitioned successfully (need clear evidence of success beyond reagent rental customers)

A top and bottom line beat for a second quarter in a row will likely see the stock meaningfully higher from current levels. Maintains Equal Weight.

- JP Morgan maintains their Underweight rating saying that while new products (GeneTitan, QuantiGene assays, new genotyping system in 2H) hold potential, they do not see fundamentals improving significantly before 2010, despite a pending tailwind from NIH stimulus, and accordingly, remain cautious on shares in the near- to intermediate-term.

Notablecalls: AFFX has been a notable laggard in the genome space for quite a while, letting Illumina (NASDAQ:ILMN) kick their arse. I suspect there were some short bets made against the stock ahead of the numbers in light of warning from ILMN some weeks back. Now the shorts are on the run with Piper sponsoring the running event.

I think the stock can trade towards the $7 level and possibly higher in the n-t

Apple (NASDAQ:AAPL): Colour on quarter - Deutsche raises target to $225

Apple (NASDAQ:AAPL) is getting lots of positive analyst commentary following results out last night.

Here are some of the highlight:

- Deutsche Bank is raising their target to $225 from $150 noting iPhone shipments of 5.2M beat their model (DB at 5.0M) with robust demand outstripping supply. The iPhone remains immensely profitable (est. 60% GM) as it added an incremental $0.79 in EPS in the Q on a pro-forma basis (adjusting for subscription accounting). Further, Apple will extend the geographic reach of the iPhone from 18 to 80 countries by the end of the Sept Q, greatly expanding its addressable market. Further, the firm believes Apple is on track to partner with China Unicom as early as this Fall. As a result, they raise their CY09 iPhone unit estimate from 23M units to 26M (Sept Q increased from 6M to 8.5M).

New product ramps on the horizon to drive incremental demand
Apple shipped 2.6M Macs which was in-line with our model and 10.2M iPods, modestly below Deutsche's estimate (vs. DB at 10.5M iPods). They believe Apple’s new product pipeline is full including a refreshed iPod line, the introduction of Snow Leopard in Sept. and new Mac form factors possibly ramping in 2H09.

Deutsche Bank adjusts their FY09 EPS to $5.87 (vs. prior $5.50) and FY10 EPS to $7.15 (vs. prior $6.25). Normalizing for iPhone accounting results in pro-forma EPS of ~$9.50 in FY09 (vs. prior ~$8.50) and $11 in FY10.

- Morgan Stanley is bumping their target to $195 saying two important risks to their Overweight thesis were taken off the table with C2Q09 results. First, Macs resumed share gains even without a sub-$700 notebook product. Second, long-term gross margin guidance of "about 30%" was de-emphasized with stronger high margin iPhone sales and prepayments of constrained components. With these risks muted, iPhone sales > supply, and Mac unit upside, they see a high likelihood of the stock approaching their new $195 price target by calendar year-end.

- JP Morgan recommends that investors continue building or adding to positions in Apple. The company reported big June quarter results, and the guidance should be enough to keep investors’ interest. Key drivers were the Mac surge that we highlighted previously, alongside strong iPhone sales and favorable margin trends. Firm believes there are plenty of catalysts to keep numbers and the stock pointing up. They reiterate their Overweight rating and are lifting their Dec 09 price target to $170.00 from $167.50 previously.

- Canaccord is upgrading AAPL to Buy with a $200 price target.

Notablecalls: AAPL is trading 6 pts higher in the pre mkt (right about where it finished in after hours yesterday). I'm somewhat hesitant to buy it here despite the new Street high target from Deutsche and overall positive comments from other firms.

I think it can do $158-$159 in the s-t today but the risk of a blow-off top is exceedingly high. Most of the upside is coming from the iPhone and as DB notes Macs were not that hot.

International Paper (NYSE:IP): Upgraded to Buy at Deutsche Bank

Packaging/Paper group is on fire today after Packaging Corp. of America (NYSE:PKG) blew estimates away last night.

International Paper (NYSE:IP) looks to be the best play on PKG's results (up 15-16% pre mkt):

- Deutsche Bank is upgrading IP to Buy from Hold and upping their price target to $24 saying that while significant risks remain, it is clearer & clearer that the containerboard industry has managed itself in a fundamentally different fashion over the past year.

Prices reported in the trade papers have dropped $70-80/ton off last autumn's cyclical peak. However, prices were reported stable in June and appear stable again in July. Moreover, most industry players remain reasonably profitable at current price levels, despite a sharp drop in volumes. Industry consolidation, a proactive approach in managing supply & avoiding inventory overhang, and a weak US$ have all played a role in this performance. Additionally, domestic & export volume trends are recovering. June box numbers represented a first real sign of domestic vol’s starting to improve. This suggests that the improvement seen in the ISM survey and the industrial production index are starting to filter through to the box market.

Note Deutsche Bank is also upgrading PKG to Buy with a $24 target.

- Buckingham Research believes that PKG’s stellar EPS performance relative to expectations is a prelude to sizable beats by other containerboard producers including International Paper. They are reiterating their view that IP is well positioned to beat 2Q estimates and are raising their price target to $20 (prev. $18)

Firm reiterates their conviction that IP can meet or exceed their 2Q EPS estimate of $0.10, which is well above the breakeven consensus. IP has been taking disproportionate amounts of downtime (70% operating rates in 1Q09), and while they don’t think the variance with competitors will be narrowed too much in 2Q, at some point, if/when business improves further, it will be and IP will generate more incremental earnings power than others.

They consider $20 to be a conservative price target and believe the stock could go meaningfully higher if investors see renewed evidence of economic recovery.

Notablecalls: IP is trading around $17.50 in pre mkt (closed $16.49) and I suspect this one may have some more upside in it today. Traders will likely be gunning for the $18 level.

One other play people will be looking at is Temple Island (NYSE:TIN) which is also trading up 5-6% in pre market.

Note that DB and Buckingham are considered to be the strongest players in the Paper/Packaging field.

Baidu.com (NASDAQ:BIDU): Downgraded to Underperform at Credit Suisse

Credit Suisse Asia team is downgrading Baidu.com (NASDAQ:BIDU) to Underperform from Neutral this mroning. Their price target is $250 (prev. $200).

According to firm's industry sources, performance of Phoneix Nest is not yet satisfactory. They believe the launch of Phoneix Nest has not replaced the Classic P4P system yet, and substantial amount of Baidu revenue is still generated by Classic P4P.

Phoneix Nest, Baidu’s new advertising system, was officially launched on 20 April. Market believed Phoneix Nest will be a short-term growth driver, and expected Phoenix Nest will totally replace Classic P4P system soon. However, according to industry sources, performance of Phoneix Nest is not yet satisfactory. Also, Baidu announced that, starting from 15 June, two types of keywords are restricted to be advertised on Phoneix Nest only: 1) Professional keywords and 2) keywords with limited business value. As such, the firm views that Baidu does not want to replace the Classic P4P system with Phoneix Nest too soon. Finally, based on theirsample keywords, the average number of ads on the LHS was between 3.5 to 6.0 ads per keyword (except 15 May) after Phoneix Nest launch, at a similar range as before. As such, CSFB believes the launch of Phoneix Nest has not replaced the Classic P4P system yet, and substantial amount of Baidu revenue is still generated by Classic P4P.

They raise 2009E EPS by 3% and 2010 by 2% due to better SPI. They increase their DCF target price to US$250 from US$200, implying 38x 2009E P/E and 1.47x PEG. Due to rising competition from Google and vertical search engines in China, the firm expects Baidu revenue market share to decline from 59% in 2008 to 46% in 2012, and should not trade at a premium. Trading at 49x P/E and 1.86x PEG, Baidu is not attractive. Due to expensive
valuation, they downgrade Baidu from Neutral to UNDERPERFORM

Notablecalls: This should hurt BIDU stock as the Phoenix Next has been their much hyped new advertising system.

I'm guessing this one will be down 5 pts in a jiffy.